Risk Free

Investments
: Unraveling the
Trust Deficit

Source: https://aswathdamodaran.blogspot.com/2023/08/in-search-of-safe-havens-trust-deficit.html
 What Are Risk-Free
Investments?
RISK-FREE INVESTMENTS ARE FINANCIAL ASSETS THAT
01 PROVIDE A GUARANTEED RETURN WITH NO
POSSIBILITY OF LOSS OF PRINCIPAL.

THESE INVESTMENTS ARE TYPICALLY CONSIDERED

02 SAFE AND INCLUDE GOVERNMENT BONDS, TREASURY
BILLS, AND CERTIFICATES OF DEPOSIT (CDS).

INVESTORS ARE ASSURED OF RECEIVING THEIR INITIAL

03 INVESTMENT BACK ALONG WITH A PREDETERMINED
INTEREST OR COUPON RATE.

Source: https://aswathdamodaran.blogspot.com/2023/08/in-search-of-safe-havens-trust-deficit.html
The Role of Risk-Free
Rates in Finance
Risk-free rates serve as the foundation for many
financial calculations and investment decisions.

They are used to estimate expected returns on risky assets

by adding a risk premium to the risk-free rate.

Asset allocation decisions are influenced by risk-free

rates, as investors balance investments in risk-free assets
with riskier ones.

In corporate finance, risk-free rates are used to

determine hurdle rates for projects, impacting
investment decisions.

Risk-free rates are essential in option pricing models,

influencing the valuation of derivative instruments.

Source: https://aswathdamodaran.blogspot.com/2023/08/in-search-of-safe-havens-trust-deficit.html
 Inflation
Higher inflation leads to
higher risk-free rates

Real Interest Rate

Reflects supply and
demand for investments

Central Bank Actions

Affect short-term rates

Market Forces
Supply and demand in
bond markets set longer-
term rates

Economic Conditions
Impact rates, especially
during crises

Source: https://aswathdamodaran.blogspot.com/2023/08/in-search-of-safe-havens-trust-deficit.html
 Sovereign Default Risk

Political Factors:
Economic Factors: Dysfunctional
Governments
Concentration, politics
Can Default
Indebtedness, and
Tax Efficiency partisan
defaults

Measuring Government Default Risk:

- Sovereign Ratings- AAA to D (default)
- Sovereign CDS Spreads- Market-based default risk indicators

Source: https://aswathdamodaran.blogspot.com/2023/08/in-search-of-safe-havens-trust-deficit.html
 Investors use risk-free rates as
benchmarks for expected returns on

1 various investments.

Higher risk-free rates can lead

to higher discount rates,
lowering
Brieflythe present value of
2 elaborate

future cash flows.

on what you want
to discuss.

Risk-free rates influence

asset allocation decisions,
Implications
for Investors 3 affecting the balance
between safe and risky
assets in a portfolio.

4 When assessing investment

opportunities in different
currencies, understanding the
respective risk-free rates is crucial.
5 In an evolving investment landscape,
alternative safe-haven assets may gain
prominence amid trust deficits in traditional
institutions.

Source: https://aswathdamodaran.blogspot.com/2023/08/in-search-of-safe-havens-trust-deficit.html