The risk-free interest rate is the rate of interest paid on the least risky financial instruments, normally considered to be the shortest-dated bond that are free from any risk. For instance, in the U.S. the risk-free interest rate is generally assumed to be that paid on a three-month Treasury bill. The risk-free interest rate is the rate of return of a notional investment with scheduled payments over a fixed period of time that is assumed to meet all payment obligations.

In practice, the risk-free rate of return does not truly exist, as every investment carries at least a small amount of risk.

The real risk-free rate can be calculated by subtracting the current inflation rate from the yield of the Treasury bond matching investment duration.

Debt Obligations

There are several types of debt obligations:

• Bonds: Debt securities in which an issuer promises to pay the holders a specified amount of interest for a specified length of time, and promises to repay the principal amount of the loan at maturity. A bond is typically a long-term debt instrument. Its holder is a creditor of the issuer who has no ownership rights in the corporation.

• Debentures: Often long-term debt securities used to obtain funds, but can also be issued as demand debentures by private issuers. A debenture is evidence of a debt on which the issuer promises to pay the holders a specified amount of interest for a specified length of time and to repay the principal amount of the loan at maturity. It is similar to a bond.

Treasury Debt

• T-Bills : These have the shortest range of maturities of all government bonds. Among bills auctioned on a regular schedule, there are five terms: 4 weeks, 8 weeks, 13 weeks, 26 weeks, and 52 weeks. Another bill, the cash management bill, isn't auctioned on a regular schedule. It is issued in variable terms, usually of only a matter of days.2? These are the only type of treasury security found in both the capital and money markets, as three of the maturity terms fall under the 270-day dividing line between them.3? 4? T-Bills are issued at a discount and mature at par value, with the difference between the purchase and sale prices constituting the interest paid on the bill.5?
• T-Notes: These notes represent the middle range of maturities in the treasury family, with maturity terms of 2, 3, 5, 7 and 10 years currently available. The Treasury auctions 2-year notes, 3-year notes, 5-year notes, and 7-year notes every month. The agency auctions 10-year notes at original issue in February, May, August, and November, and as reopenings in the other eight months. Treasury notes are issued at a $100 par value and mature at the same price. They pay interest semiannually