Definition

A risk-free interest rate is the theoretical amount of return of an economical commitment with no recourse to economic loss.

Brief Explanation

One presentation is that the risk-free interest rate represents the eye that an investor would expect from a risk-free investment commitment over a given time period. In the exercise, to practice this rate in a particular situation, a risk-free bond is typically selected that is issued by a government or agency whose default risks are so low as to be minimal. Since the risk-free amount can be obtained without recourse, any other economical commitment will have additional risk.

Moreover, it is highly significant, while the general application of modern profile theory is based on the capital asset pricing design. It is also a required input in economical computations. Note that some finance and economic concepts assume that market members can borrow at a risk-free interest rate. There are numerous issues with this design, the most basic of which is the reduction of the description of the utility of stock holding to the expected mean and the difference in the returns of the profile.