A risk-free fate is the rate of interest a borrower has to be pay or an investor expects to earn on an investment carrying zero risks. It is the minimum return that an investment must give over a period to be profitable. If you keep the money in a fixed deposit, we get an assured interest. Risk free rate is like that and can be calculated by using a mathematical formula.

Generally, the central bank of a country guarantees a risk-free rate on government bonds or bank deposits.

## Real vs Nominal Risk-Free Rate

Nominal risk-free interest rate does not consider inflation. It is the stated interest on a loan or return on an investment without considering macroeconomic impacts or compounding of interest.

Real risk-free rate is adjusted to the effects of inflation. It reflects the real cost that the borrower withdraws of investor invests.

The real risk-free rate should be considered while taking a business decision for profitability of a project.

## Conversion between Real and Nominal Risk-Free Rate

# Risk-Free Interest Rate

Risk Free Rate of Return Formula = (1+ Government Bond Rate)/ (1+Inflation Rate)-1

## Calculate Using Excel

Step 1: Insert the input data available from the website of the central bank of the country.

Step 2: Calculate the Real Rate using the formula.

Risk Free Rate of Return Formula = (1+ Government Bond Rate)/ (1+Inflation Rate)-1

Step 3: Calculate Nominal Risk-Free Rate.

The formula is: Nominal Risk Free Rate of Return Formula = (1+ Real Risk free rate)/ (1+Inflation Rate)