The risk-free rate refers to the yield of high-quality government bonds. The number of models and theories based on this concept testifies to its importance in finance. They include risk premium and models such as the capital asset pricing model. Like most models, it is based on a set of assumptions. Theoretically, there should be no risk for the investor. Below I will discuss the risk-free rate and its importance to finance (Damodaran, 2010). The most common risk-free interest rate is the short-term U.S. Treasury bill and is considered a proxy. It is therefore valued as an entity at risk of default. They are considered the most liquid bonds on the market (Buttonwood, 2014). It is considered easy to obtain and therefore most efforts focus on estimating the risk parameters of individual firms and the resulting risk premiums (Damodaran, 2011). The risk-free rate of return is essential for measuring present value. It recognizes that today's cash is not the same as tomorrow's. If invested, we should expect the time value of money to remain the same. These are key elements of the financial world and important indicators for investors. The measurement of risk is the main reason for the concept of risk-free rate and its importance to the theory of finance. All investments are made with the expectation that returns will be made over the life of the asset. The risk-free rate comes into effect when the actual and expected rate of return differ. The concept of no risk is that actual returns equal expected returns. An investment is risk free when there is no spread around the return (Damodaran, 2014). This introduces the notion of risk premium. The risk premium is calculated by deducting the riskiest return from the risk-free rate. Middle of paper is a flaw in the financial system. Many critics have said the 2008 economic crisis exposed the weaknesses of traditional financial models, including the risk-free rate. As a traditional cost of equity, yields on risk-free government securities have seen a significant decline. At the time, many central banks emphasized a large portion of medium- and long-term bonds, which some believe is a cause of falling yields (Grabowski, 2014). There is nothing truly risk-free. Stocks are always risky because the future is unknown and all stocks carry a measure of risk. But as we can see with the majority of return models, the risk-free rate is extremely important. Can this problem be solved if the risk-free rate is given a new definition? Should it be the lowest rate risk with return? Fisher says that many investors consider the risk-free rate to be a good enough measure (Fischer, 2014).