Credit glossary
What is a Risk-Free Rate?
The theoretical return on a zero-risk investment, typically proxied by short-term government bond yields (e.g., US T-Bills).
Definition
Risk-Free Rate
The theoretical return on a zero-risk investment, typically proxied by short-term government bond yields (e.g., US T-Bills).
Example
How it works in practice
A cat bond investor earns SOFR on the collateral held in the trust account, currently around 4.5%. This is the risk-free component of the total return. On top of this, the investor receives a spread of 6% for bearing catastrophe risk. If SOFR rises or falls, the total return moves with it, but the risk premium for the catastrophe exposure stays fixed.
Related terms
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