ShmoopTube
Where Monty Python meets your 10th grade teacher.
Search Thousands of Shmoop Videos
Banking Videos 367 videos
What is Collateralized Mortgage Obligation (CMO)? A CMO is a mortgage bond that consists of a large number of different individual mortgages bundle...
When a bond is secured, it means it's protected, i.e. there are assets that would be forfeited if repayment is not made. When it's unsecured... it'...
What is Counterparty Risk? Counterparty risk is the risk to either party within a transaction that the other will not or be unable to abide by the...
Finance: What are Debt Service and Debt Service Ratio? 3 Views
Share It!
Description:
What are Debt Service and Debt Service Ratio? Debt service is the amount of funds needed by a borrower to successfully cover interest and principal payments over a specified time period. The debt service ratio is a calculation of net operating income divided by total debt service. The quotient of the calculation gives the Debt Service Ratio and the difference of the service numbers from the income indicate if the borrower can handle additional debt if needed.
- Social Studies / Finance
- Finance / Financial Responsibility
- College and Career / Personal Finance
- Life Skills / Personal Finance
- Finance / Finance Definitions
- Life Skills / Finance Definitions
- Finance / Personal Finance
- Courses / Finance Concepts
- Subjects / Finance and Economics
- Finance and Economics / Terms and Concepts
- Terms and Concepts / Accounting
- Terms and Concepts / Banking
- Terms and Concepts / Board of Directors
- Terms and Concepts / Bonds
- Terms and Concepts / Company Management
- Terms and Concepts / Company Valuation
- Terms and Concepts / Credit
- Terms and Concepts / Incorporation
- Terms and Concepts / Investing
- Terms and Concepts / Managed Funds
- Terms and Concepts / Metrics
- Terms and Concepts / Regulations
- Terms and Concepts / Stocks
- Terms and Concepts / Wealth
Transcript
- 00:00
Finance, a la shmoop. What is debt service and debt service ratios? Well debt
- 00:08
service is just the interest you pay on debt in a given year. Like you're [Definition written on a 100 dollar bill]
- 00:14
servicing the debt, like think about the oil demanded by a robot in a year she
- 00:19
demands to be serviced and the oil you serve her will you know quench her [Robot drinking oil]
- 00:24
thirst. Well debt service can be easy or it can
Full Transcript
- 00:28
be hard, like whatever.com has 50 million bucks of 6 percent debt costing 3 [The debt service calculation is shown]
- 00:33
million a year to service. Well if whatever.com had 40 million bucks in [Vault full of money]
- 00:38
cash profits servicing its debt would then be easy and it would have a debt [Someone repeatedly pressing an easy button]
- 00:43
service ratio of 40 over 3 or 13 and 1/3 times coverage. Said another way the odds [The ratio calculation is shown]
- 00:50
that whatever.com would find itself in a position that it couldn't service
- 00:54
its debt are well very low. But think about the other side of the coin if [Somone about to flip a coin]
- 00:58
whatever.com had only 4 million dollars in cash profits well then it's debt
- 01:02
service ratio is 4 over 3 meaning that 75% of its cash flow leaves the company [Money going from whatever.com to the lenders]
- 01:08
and goes into the coffers of the kindly loving lenders who are nervous about the
- 01:13
company falling into default and going bankrupt which does not make the oil go
- 01:18
down easy... [Robot drinks oil and spits it out]
Related Videos
GED Social Studies 1.1 Civics and Government
What is bankruptcy? Deadbeats who can't pay their bills declare bankruptcy. Either they borrowed too much money, or the business fell apart. They t...
What's a dividend? At will, the board of directors can pay a dividend on common stock. Usually, that payout is some percentage less than 100 of ear...
How are risk and reward related? Take more risk, expect more reward. A lottery ticket might be worth a billion dollars, but if the odds are one in...