# Discuss the two major factors that determine the market nominal risk-free rate.

## Question:

Discuss the two major factors that determine the market nominal risk-free rate.

## Nominal Risk-Free Rate:

The nominal risk-free rate is the rate on government securities. Although the rate on short term sovereign securities is not truly risk-free, it may be considered as risk-free for practical purposes.

The two major factors that determine the nominal risk-free rate are:

• Real risk-free rate - is the risk-free rate that should be equal across the economies and which does not consider the effect of inflation. Theoretically, it should be the same for all countries.
• Inflation Rate - is the general increase in prices for a given economy. The risk-free rate compensates for inflation because nobody would want to see a depreciation in the value of their investment.