Risk-free rate

The risk-free rate is the return available on an investment considered to carry essentially no risk of default, typically the yield on a stable government's bonds. It serves as a baseline: any riskier investment should be expected to offer more than this rate, otherwise there's no real reason to accept the extra risk.

The risk-free rate shows up as the starting point in several valuation tools, including cost of equity, since it represents the safe alternative return an investor gives up by choosing to hold a stock instead.