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What is Required Rate of Return?

Required Rate of Return is the return that investors will expect to earn on their money, given the risk and costs involved.

Required Rate of Return is determined by the market for a particular security or asset at a given time. Issuers of fixed or variable coupon bonds must look at the rates offered by their peer institutions with similar credit ratings.

Investors will require a certain rate of return if they are going to invest their money, and this is where the RRR gets its name. The calculations which help an issuer to arrive at the RRR will include the current risk-free rate (10 year treasury bond rate), liquidity, inflation, and so on.

The RRR is also known as the cost of capital (CoC) or the weighted average cost of capital for a company, because the RRR is the cost of raising capital by enticing investors.

Keywords: credit rating, risk free rate, supply and demand, required yield, cost of capital, bond issues, required rate of return,