Question

why the beta of debt is smaller than beta of equity ?

Answer 1

sorry i meant " interest rate "

Answer 2

What do you mean by interest rates? Maybe you mean cost of debt and cost of equity? The reason is that debt always has seniority over equity.

Answer 3

Beta is a measure of risk. Debt has less risk than equity. For example, Debt is a US T-bill. It has very low risk because its guarenteed by the government that they will pay you the money and interest on the bill. Now look at equity which is stocks. Stocks are a much riskier investment so for someone to take on that risk, they are going to want more interest paid to them. Because Debt is a much less risky investment than equity is, debt has a lower interest rate associated with it.

Answer 4

Equity is more riskier over debt because in the occasion of bankruptcy, first the debt is paid of, second, the debts to employees are paid of and last whatever is left (if there's anything) is divided among the equity holders.