<h2>Risk-Free Rate Of Return</h2>
<p>The <strong>risk-free rate of return</strong> is the theoretical return on an investment with virtually no risk. It's the expected return on an investment where the borrower is assured of getting back the full amount of the loan, along with interest, without any default risk.</p>

<h2>How It Works</h2>
<p>The risk-free rate is typically represented by the yield on government bonds, such as U.S. Treasury bonds. These are considered risk-free because the government has the power to raise taxes or print money to make good on its debt obligations. Here's a simple breakdown:</p>
<ul>
  <li>Government issues bonds to raise money.</li>
  <li>Investors buy these bonds, lending money to the government.</li>
  <li>The government promises to pay back the principal amount plus interest at maturity.</li>
  <li>The yield on these bonds is considered the risk-free rate because the risk of default is extremely low.</li>
</ul>

<h2>Why It Matters for Traders</h2>
<p>The risk-free rate is a crucial concept in finance and trading for several reasons:</p>
<ul>
  <li><strong>Benchmark for other investments</strong>: It serves as a benchmark against which the returns of other investments are compared. If an investment offers a lower return than the risk-free rate, it might not be worth the risk.</li>
  <li><strong>Capital Asset Pricing Model (CAPM)</strong>: The risk-free rate is a key input in the CAPM, a model used to determine the expected return on investments based on their systematic risk.</li>
  <li><strong>Futures pricing</strong>: It's used in the pricing of futures contracts, as the risk-free rate is the rate at which the present value of future cash flows is discounted.</li>
</ul>

<h2>Example</h2>
<p>As of writing, the yield on 10-year U.S. Treasury bonds is around 1.5%. This means that, all else being equal, an investment in these bonds is expected to return 1.5% per year. This is the current risk-free rate.</p>

<h2>Key Takeaways</h2>
<ul>
  <li>The risk-free rate is the return on an investment with virtually no risk.</li>
  <li>It's typically represented by the yield on government bonds.</li>
  <li>It serves as a benchmark for other investments and is a key input in various financial models.</li>
  <li>It's used in the pricing of financial instruments like futures contracts.</li>
</ul>