The risk free rate represents the return from the lowest risk investment in a given economy. It is determined by country risk and expectations on a country’s currency inflation.

Risk free rates are normally proxied on the rates of 10-year government securities – the standard financial instruments to fund public debt – as they are the safest investment on the market. They are generally country specific (except for companies based in monetary unions. In the Eurozone area, for example, the German rate is considered). 

This data is publicly shared by the most important security exchanges. In the case that a country’s debt rate data is unavailable, continental level average rates are applied.

Within the risk free rate, inflation is included to discount for increasing cash flows caused by systemic increases in prices, rather than by improvements of company results.

As any equity investment is by definition risky, a company’s discount rate cannot be lower than the risk free rate.

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