Given : Real rate of interest 3% Premium 6% Risk premium 3% What is the risk free rate of interest?

Question:

Given :

Real rate of interest 3%

Premium 6%

Risk premium 3%

What is the risk free-rate of interest?

Risk Free Rate of Return:

The risk-free rate of return is the expected return of the investment when there is no risk involved. However, investment does not exist without risk. Therefore, we compute the nominal rate to find the rate of return with risk.

Answer and Explanation:

To compute the risk-free rate of return, we add the real rate of interest (3%) and the inflation premium (6%).

  • Risk free rate of return = 3% + 6% = 9%

Here, the risk-free rate of return is 9%.

Note: It is called a risk-free rate of return rather than a risk-free rate of interest.


Learn more about this topic:

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How to Calculate Risk Premium: Definition & Formula

from Financial Accounting: Help and Review

Chapter 5 / Lesson 26
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