Risk free rate: A brief analysis.

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An investment is called to be risk-free if the below two conditions are satisfied:

1)  1) No default Risk

2) 2) No Reinvestment risk

 

So what does default risk mean?

Default risk is the risk that a lender takes on in the chance that a borrower will be unable to make the required payments on their debt obligation

 

And Reinvestment risk?

This is the chance that the cash flows from an investment might have to be reinvested in a way that does not match the proceeds of the original, for example at a lower interest rate.



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