The risk-free rate is the theoretical return on an investment with zero risk of default — empirically proxied by short-term US Treasury bills (T-Bills), considered the safest investment globally. Currently ~4-5% for 3-month T-Bills. The risk-free rate is the foundation of finance: it sets the discount rate for valuing future cash flows and the baseline for expected returns. Required return on any risky investment = Risk-Free Rate + Risk Premium. Falling risk-free rates inflate all asset prices (lower discount rates increase present value); rising rates compress prices. The 2022-2023 risk-free rate spike from 0% to 5%+ explains much of the broad asset declines that year.
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Risk-Free Rate
August 22, 2026 · Aditya Gupta
Finance
Related terms
Bond Market
The bond market is the global market for debt securities — US Treasuries, corporate bonds, municipal bonds, mortgage-backed…
Bubble
An asset bubble is a sustained rise in asset prices well above fundamental value, driven by speculation rather…
Comparative Advantage
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