---
title: "Risk-Free Rate"
url: "https://mahouse.world/glossary/risk-free-rate"
type: "glossary term"
topic: "Valuation"
author: "Ihor Vlasov"
reviewed: "2026-09-20"
published: "2026-08-10"
---

# Risk-Free Rate

The risk-free rate is the return on an investment with no default risk — in practice the yield on a government bond in the currency and at the horizon of the cash flows being valued — and the base every required return is built on. When it rose from near zero to 4% in 2022–2023, every valuation built on it fell, and fintech's fell most.

**Also known as:** Risk-free return, Rf, Government bond yield

## Key facts

- **Used at:** the capital asset pricing model, the weighted average cost of capital, every discounted cash flow, the pricing of bonds and loans (as the base rate), and the hurdle any investment must clear
- **Binding:** no — a market observation and a modelling choice
- **Typical choice:** the ten-year government bond yield in the currency of the cash flows (US Treasuries for dollars, Bunds for euros, gilts for sterling); some valuers use a normalised long-run rate rather than the spot yield when markets are distorted
- **Typical levels:** near 0% for euros and 0.5–1.5% for dollars through 2020–2021; 2.5–4.5% in 2023–2025; the rise added 3–4 points to every discount rate
- **Parties:** everyone valuing anything; central banks, whose policy sets the short end; bond markets, which set the rest

## How the risk-free rate works in practice

A valuer discounting a fintech's cash flows needs a rate. It starts from what an investor could earn with certainty — a government bond — and adds what the fintech's risk deserves. The bond chosen should match the cash flows: their currency (a euro business is discounted from Bund yields, not Treasuries), and their horizon (a ten-year bond for a perpetuity valuation, not a three-month bill). The spot yield is the market's number today; a normalised rate is the valuer's judgement of a sustainable level, defensible when the spot rate is distorted by policy — as it was in 2020–2021 — and dangerous when it becomes a way to keep valuations high after rates have risen.

The effect of the rate on valuations is arithmetic and large. A cash flow of €10m growing 3% forever is worth €143m at a 10% discount rate and €100m at 13% — a 30% fall for a three-point rise in the risk-free rate with everything else unchanged. Growth companies, whose value sits far in the future, fall most, which is what happened to fintech in 2022: the businesses did not change, the rate at which their futures were discounted did, and the 2021 valuations became the down rounds of 2023.

For a lender the risk-free rate is also the base of its own pricing: a loan at "SOFR plus 400" or "Euribor plus 350" reprices with the rate, and a fintech whose funding is floating and whose lending is fixed learns the meaning of duration when the rate moves.

## Example

A valuer prices a payments fintech in December 2021 and again in December 2023. Cash flows: €10m in year one, growing 20% for five years, then 3%. In 2021: risk-free 0.2% (ten-year Bund), equity premium 5.5%, beta 1.3, size and specific premiums 5% — cost of equity 12.4%; the valuation is €310m. In 2023: risk-free 2.6%, all else equal — cost of equity 14.8%; the same cash flows are worth €228m. The business grew as planned in between; its value fell 26% because the alternative to owning it — a government bond — paid 2.4 points more. The company's 2021 round at €300m post-money was, by 2023, a round the next investor would not clear.

## Common mistakes

- A risk-free rate from the wrong currency, or a short-term bill for long-term cash flows.
- Normalising the rate downward after a rise to protect a valuation.
- Forgetting that the equity risk premium and the risk-free rate are estimated together; borrowing one from a source and the other from elsewhere.
- Treating a government bond as risk-free in a currency or a country where it is not.
- Ignoring the rate's effect on the terminal value, where most of a growth company's valuation sits.

## Related terms

- [Cost of Equity](https://mahouse.world/glossary/cost-of-equity.md)
- [Weighted Average Cost of Capital](https://mahouse.world/glossary/weighted-average-cost-of-capital.md)
- [Discounted Cash Flow](https://mahouse.world/glossary/discounted-cash-flow.md)
- [Terminal Value](https://mahouse.world/glossary/terminal-value.md)
- [Yield Curve](https://mahouse.world/glossary/yield-curve.md)
- [Beta](https://mahouse.world/glossary/beta.md)

— Ihor Vlasov, M&A FinTech Expert. Last reviewed 2026-09-20. https://mahouse.world/authors/ihor-vlasov