Nothing is risk free. In finance, government bonds are often referred to as "risk-free", the "risk-free interest rate". This is false. Governments can choose to default, as happened with Russia in 1998. Even without formal default, a government can inflate their debt away: inflation risk.
Neither are government bonds necessarily the lowest interest rate available. In 2012, the yield on Greek government bonds was far higher than that of the Coca Cola Hellenic Bottling Company.
The "risk free interest rate" is the interest rate someone would demand in the absence of risk, simply for the time. In practice, they will demand a risk premium on top.
ReplyDeleteHoppe: "kings typically had to pay above-average rates of interest reflecting their comparatively high default risk"
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