Risk free rate is also known as “risk free interest rate” and refers to the yield that can theoretically be obtained from riskless assets (risk – free products) with zero or minimal risk. It refers to yields of deposits and savings guaranteed payment of principal and interest, short-term financial products of interbank, financial products such as government bonds. Since risk-free rate can be invested at ease, generally this product is becoming more popular, and the more profitable you have when you choose a financial product, the better it is, if there is risk involved, select that product As a result, there are many purchases of risk-free rate financial products. In the past investment was like a one-shot to take a lot of risk while taking risk but now, as many customers as possible reduce the risk as much as possible without increasing the importance of the magnitude of the profits, so that government bonds and short-term deposits Popularity is focused on. And in the normal market, it often refers to “yield on interbank rates (call rate · LIBOR)” and “government bonds”.
Risk free rate is used for discount rate calculation
The risk free rate is also used when calculating the discount rate. The discount rate refers to the interest rate used to convert the future value into the present value, but the risk premium is added to the risk free rate. In performance evaluation of investment performance such as investment trusts (funds), we measure the extent to which the return (return on investment) was able to be increased by exceeding the risk free rate as an excess return. If investment is made for financial instruments whose investment principal is not guaranteed, there is no point in taking risks if the expected rate of return does not exceed the risk free rate. For risk-free rate products, profits are unlimitedly low as much as risk is low, so even if you take a long time, you may get only about 0.1% profit from principal. But by considering the risk premium we can examine wise financial products. If there is a tendency to avoid risk usually, risk is attenuated because there is no adversary in the place where original risks are likely to occur, but since the profit obtained remains unchanged, the dividend on risk becomes extremely high and risk-free You can also get a lot of money with the same risk as the rate.