Question

what is risk free assets

Answer 1

Risk is the possibility of loss, or in the case of something like a bond, the issuing firm defaulting or filing bankruptcy. As you can see from the recent debt crisis, a "risk free asset" was once a label that applied to US Treasury Bonds, which had a "zero" percent chance of risk - that is, governments can always raise taxes to pay off their bonds. If you hold US T-bonds, you are exposed to a very low level of risk. (Even today, after the downgrade, AA+ is still a good "investment quality" bond.)

In an environment where risk is zero, interest tends to reflect only the cost of liquidity and time, and is typically lower.

This doesn't just apply to bonds, however. Anything that has a zero chance of loss may be considered risk-free, from gold to widgets.