Risk free interest rate formula

Annual risk free interest rate - The cash flow must be discounted using the interest rate for the appropriate period: if the interest rate changes, the sum must be discounted to the period where the change occurs using the second interest rate, then discounted back to the present using the first interest rate. The present value is always less than or equal to the future value because money has interest-earning potential, a characteristic referred to as the time value of money, except during times of negative interest rates, when the present value will be more than the future value. It matters:the notion of a risk-free rate of return is a fundamental component of the capital asset pricing model, the black-scholes option pricing model and modern portfolio theory, because it essentially sets the benchmark above which assets that do contain risk should perform. If the money is to be received in one year and assuming the savings account interest rate is 5%, the person has to be offered at least 5 in one year so that the two options are equivalent (either receiving 0 today or receiving 5 in one year).

Session 3: The Risk Free Rate

Sets up the requirements for a rate to be risk free and the estimation challenges in estimating that rate in different currencies.