I am reading up on some DCF valuation issues and I wonder how you calculate the beta of the debt of a firm? I know how to calculate beta for equity (using CAPM) but with debt my book (mcKinsey) assumes that it is zero (for simplicity) and does not really explain how you calculate it. I guess you should use CAPM but in the book they simply use an equity index as market portfolio. Using this market portfolio when calculating beta of debt seems a bit strange to me. Any help most appreciated!

How about duration?

it's not an exact science - something around 0.3 would be a start

isn't fairly straightforward to work out the return on a bond and regress that against some index ? My reservation about using CAPM is that bond returns when there is credit risk exhibit a skewness that makes the usual normal return distribution assumptions untenable

QuoteOriginally posted by: daveangelisn't fairly straightforward to work out the return on a bond and regress that against some index ? My reservation about using CAPM is that bond returns when there is credit risk exhibit a skewness that makes the usual normal return distribution assumptions untenableThat is a very real problem. The beta of the debt is a function of the quality of the debt -- high risk debt is much more equity-like and can become 100% equity-like in a restructuring that converts debt to equity. The result is a non-linear regression between returns on debt and returns on the index with beta becoming large during bear markets.