The risk-free rate is usually approximated by interest rates on U.S. government debt, because the US government:
A) is considered extremely unlikely to default.
B) sets all policy concerning interest rates.
C) backs all loans secured with that rate.
D) will never default on a loan that it makes.

Question

Quizplus · Accepted Answer

The US government is considered extremely unlikely to default on their debt, so interest rates on US government debt are considered the closest thing to a risk-free rate. The other options (B, C, and D) are not entirely accurate. While the US government sets certain interest rates, they do not control all interest rates. Additionally, the US government does not back all loans secured with the risk-free rate, and while they are very unlikely to default on a loan they make, it is not technically impossible as no entity can guarantee they will never default on any loan.

The Risk-Free Rate Is Usually Approximated by Interest Rates on U.S