Risk-Free Rate

The rate of return available on assets like T-bills, money market funds or bank deposits is taken as the proxy for risk-free rate. That is maturity period of T-balls and bank deposits is taken to be less than one year, usually 364 days. Such assets have very low or virtually negligible default risk and interest rate risk. However, under inflationary conditions, they are risk-less in nominal terms only. In fact, the real return (nominal return minus inflation rate) may become zero, even negative, when inflation picks up.

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