Risk-free rate inferred from zero-coupon Treasury bonds (T-bills)
Image: Минфина РФ, Public domain, via Wikimedia Commons
Risk-free rate
Risk-free rate inferred from zero-coupon Treasury bonds (T-bills)
The risk-free rate is derived from zero-coupon Treasury bonds (T-bills) as they are considered virtually default-free. Market participants use the yield to maturity on these bonds to estimate the risk-free rate in a given currency. This approach is based on the assumption that T-bills carry negligible default risk, making them a reliable benchmark for the risk-free rate.
Example
If a zero-coupon Treasury bond with a face value of $1,000 matures in one year and is currently priced at $950, the yield to maturity (risk-free rate) is approximately 5.26%.
Remember this
Understanding the risk-free rate is crucial for investors as it serves as a benchmark for evaluating the risk and return of other investments.
Text adapted from Wikipedia, licensed under CC BY-SA 4.0.
Related concepts
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Educational content, not financial advice.
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