Beta debt = 0 when calculating wacc?

CFA Level III
#1

Debt has interest rate risk. Why do we ignore it and only use beta as a risk measure?

#2

compared to equity’s beta, the debt’s beta is too small.

#3

Beta is a measure of equity market risk

#4

And the correlation between stock market and bond martket is very low.

#5

But, in emerging markets, the correlation between equities and bonds is quite high.

#6

Keep in mind that in the context of WACC you are assuming the company is a going concern and that debt + interest will be paid… which equates to a ‘zero-risk’ security ie: Treasury bonds are by definition (haha… maybe not anymore but that’s another discussion) risk free but are subject to interest rate risk

#7

I think everyone is over analyzing here. For WACC calculation debt has 0 beta. DONE

#8

batgirl4ever Wrote: ------------------------------------------------------- > Keep in mind that in the context of WACC you are > assuming the company is a going concern and that > debt + interest will be paid… which equates to a > ‘zero-risk’ security > > ie: Treasury bonds are by definition (haha… > maybe not anymore but that’s another discussion) > risk free but are subject to interest rate risk +1