The risk-free rate of return is the minimum return an investor expects from an investment with no risk of default or loss of capital. The origin of the term "risk-free rate of return" is not clear, and it is likely that it was developed and used by economists and finance professionals over time. The concept of a risk-free rate of return, however, has been around for many years and is a fundamental principle in finance and economics. It is an important concept in corporate finance, valuation and portfolio management. There is no consensus on how to calculate the risk-free rate. This article will describe how we calculate it. We believe this method is the most common approach.

**Step 1: Identify the Benchmark Rate**

The selection of the best investment choice is an important input. Amongst banks and other institutional lenders
interbank swap rates are also used. SOFR the Secured Overnight Funding Rate replaced LIBOR the
London Interbank Offered Rate in US banks.
US Treasuries are often used as a
benchmark for determining the risk-free rate of return in the investment industry and academics.
The most appropriate choice for your needs may vary. Local government bonds or highly rated
large businesses are used when US rates are not
the best option. In this article, we will discuss how
to calculate the risk-free rate of return using US Treasuries.

**Step 2: Determine the Yield to Maturity**

The next step is to determine the yield to maturity (YTM) of the US Treasury securities. The YTM
is the total return anticipated on a bond if the investor holds the bond until maturity,
including both interest payments and any potential capital gain or loss. Yield to maturity
can be found on websites such as the U.S. Treasury website, financial news websites, or bond
market data providers.

**Step 3: Calculate the Risk-Free Rate of Return**

The risk-free rate of return can then be calculated by using the YTM of the US Treasury securities.
For example, if the yield to maturity on a 30-day US Treasury bill is 1.2%, then the risk-free
rate of return for a 30-day investment is 1.2%. If the yield to maturity on a 90-day US
Treasury bill is 1.5%, then the risk-free rate of return for a 90-day investment is 1.5%.

**Step 4: Estimating the Rate for an Investment Period that Does Not Correspond to a
Known Maturity.**

When the desired period does not correspond to a known maturity,
it is necessary to estimate the risk-free rate of return. For example, if you want to estimate
the risk-free rate of return for 46 days, you can use a linear interpolation method.

Here's how it works: Let's say the yield to maturity on a 30-day US Treasury bill is 1.2% and the yield to maturity on a 90-day US Treasury bill is 1.5%. The risk-free rate of return for 46 days can be estimated by finding the difference between the yields (1.5% - 1.2%) and dividing it by the difference in the maturities (90 days - 30 days). This gives us a slope of 0.0015 / 60 = 0.000025. We can then use this slope to estimate the risk-free rate of return for 46 days by multiplying the slope by the difference in the desired maturity (46 days - 30 days) and adding it to the 30-day rate.

**Example**: Risk-free rate of return for 46 days:

1.2% + (0.000025 * (46 - 30)) = 1.2004%

In this example the risk-free rate is 1.2004%.

The risk-free rate calculated above is known as the nominal risk-free rate. When we adjust the
any rate for inflation it is known as the *real* rate.

The formula to calculate the real risk-free rate:

Nominal risk-free rate - inflation rate = Real risk-free rate of return

**Example**: Nominal rate of 3.4%, inflation rate of 2.9%:

3.4% - 2.9% = 0.50%

In this example the real risk-free rate is 0.5%.