A risk-free interest rate is an interest rate on an investment without risk. The theoretical assumption on which its definition is based comes from the observation that it is always possible to find a security that offers a safe and predictable return. That is, a security whose return is tied to a marginal product of capital without the additional component being based on the risk premium.
In Italy, BOTs – or treasury bills – are considered "risk-free". It is no coincidence that these securities are known to be government bonds with extremely short maturities, similar to US treasury bonds.
These securities are important because they become a reference point for “pricing” risk. Any other possible investment will make this “base rate” an intrinsic part of the investment, adding the “risk premium”, a risk-adjusted return component (e.g., insolvency and volatility).
Publish your profile for free
Fill in your information completely for a higher chance
of being contacted by our readers