Visual Guide to Financial Markets

Government

Can you imagine an investment that carries no risk? No worries about markets, liquidity, or anything else? What kind of an interest rate would you expect this investment to provide? Put another way, what kind of a return would you need to be a buyer?

For many investors, the answer to the first two questions is “yes.” That’s because a risk-free rate is often used in evaluating returns and in making relative-value judgments. The rate is theoretical because every investment carries some risk.

The third and fourth questions can be answered by looking at the interest rate on three-month Treasury bills. It’s reasonably close to a risk-free ...