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Risk Free Rate

ZACH DE GREGORIO, CPA www.WolvesAndFinance.com Discussion of the theoretical concept of the "Risk Free Rate." This also provides an explanation of why people use US Treasuries as the Risk Free Rate and why so many people watch the Yield Curve for US Treasuries. The Risk Free Rate is a theoretical concept that stands for the one investment opportunity that is the most risk free. It is not entirely without risk. It is finding the rate of the most risk free opportunity, because this sets the benchmark for your financial analysis. Every opportunity then exists on a spectrum of risk, starting at the risk free rate. How you use this on a practical level, is you would use US treasuries. The US economy is very large, consistent economy, and is considered as the least risky alternative. Government securities are considered less risky than companies. Governments generally don’t go bankrupt (with a few notable exceptions). Government securities are based on the productivity of a country’s people, who pay taxes which pay the interest on bonds. If the government budget ever gets into trouble they can raise taxes which makes it a low risk investment. This is a generalization and I am not hyping US treasuries. The goal is to pick some security to use as a benchmark for the risk free rate. The point is that everything is interrelated in finance. As the risk free rate moves up and down, it impacts everything else in finance. Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.