What is the risk-free rate?

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Through this series of articles, we aim to explain how to access risk-free rates in euros or dollars, which are now significantly positive. No need to be a finance expert—we start from the ground up to cover the essentials!

Let’s begin by defining the risk-free rate.

The price of time

An interest rate fundamentally reflects the time value we place on money.

This idea of interest as the "price of time" predates modern monetary systems. It dates back to early civilizations, such as the Mesopotamians, who developed credit systems to support agricultural growth.

However, the price of time isn’t the only factor influencing the interest rate on a loan. If you were to lend your money, you’d also consider:

• The borrower’s nature and credit quality: Are they a government, a bank, a company, or an individual? Do you have objective ways to assess their likelihood of default or bankruptcy? The lower the risk, the lower the rate.
• Collateral or guarantees: Is the loan secured by assets that can be transferred to you if the borrower defaults?
• A secondary market: Is the resulting debt liquid? In other words, can you easily sell it to a third party before maturity?
• The loan term: Is it for one day, one month, one year, or ten years? Typically, longer-term loans carry more risk and therefore higher rates.
• A credible legal system: What laws govern the loan contract? Can you rely on impartial, efficient courts to enforce the agreement if needed?

Risk premium and risk-free rate

All these risk factors are encapsulated in what’s called the risk premium.

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The risk-free rate, as its name suggests, represents the “pure” price of time, free of risk considerations. But how do we measure it? In practice, the risk-free rate is the interest rate on a loan with the following features:

• The borrower has virtually zero risk of default.
• The debt is highly liquid, meaning it can be sold or settled at any time with little to no discount.
• The maturity is very short, typically ranging from a few days to a few months.
• The loan agreement is governed by a robust legal framework.

Risk-free assets

In today’s financial system, only three assets fully meet these criteria and can genuinely be considered “risk-free loans”:

1. The portion of individual and business bank deposits guaranteed by the government (in France, up to €100,000 per person per institution).
2. Central bank deposits, known as “bank reserves.”
3. Short-term debt issued by the most creditworthy states, such as France, Germany, or the United States, referred to as “Treasury Bills” (or “T-Bills”).

These three types of assets should, in theory, yield the risk-free rate. The problem? Your bank account deposits typically don’t. In future articles, we’ll explain how banks access risk-free euro and dollar rates, which are now highly positive, and more importantly, how you—as an individual or business—can benefit from them too!

At Spiko, we simplify access to risk-free rates

Spiko offers an easy way to earn risk-free returns in euros and dollars through regulated financial products known as “money market funds.”

Spiko’s money market funds invest in Treasury Bills issued by the most stable states in the eurozone and the U.S. federal government. They provide daily returns on your cash, along with constant access to your money—no notice periods, penalties, or withdrawal fees.