Risk-Free Interest Rate Law and Legal Definition
The Risk-Free Interest Rate is the theoretical rate of return of an investment with zero risk, including default risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a given period of time. Since this interest rate can be obtained with no risk, it is implied that any additional risk taken by an investor should be rewarded with an interest rate higher than the risk-free rate. Though a truly risk-free asset exists only in theory, in practice short-dated government bonds of the currency in question is used. For USD investments, usually US Treasury bills are used.