Risk-free rate
Principles of Finance glossary · Risk, Return & Portfolio Theory
Definition
The yield on a default-free security, usually a short-term government bill.
Risk-free rate in plain English
The risk-free rate is the return you can earn on the single safest place to park money, where getting paid back is essentially certain — usually a short-term government bill, because a big stable government almost never fails to repay. It matters because it's the baseline every other investment gets compared to: why take ANY risk unless you expect to beat this? Think of it as the 'floor' interest rate — the least you could earn without gambling at all. Everything riskier has to promise more than this to be worth it.
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