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Debt Service Reserve Fund as a Response to Repayment Risk
Author(s) -
Khoju Madhab R.,
Nelson Carl H.,
Barry Peter J.
Publication year - 1993
Publication title -
applied economic perspectives and policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.4
H-Index - 49
eISSN - 2040-5804
pISSN - 2040-5790
DOI - 10.2307/1349444
Subject(s) - debt service coverage ratio , debt service ratio , debt , economics , loan , monetary economics , investment (military) , basis point , interest rate , external debt , finance , business , debt to gdp ratio , politics , political science , law
A theoretical model of an optimal debt service reserve fund loan contract is constructed. The optimal size of a debt reserve is derived for the lender and the borrower. Changes in the optimal size with respect to changes in exogenous factors, such as interest rate or variability of investment returns, are derived. Means for resolving the difference between the lender's and the borrower's optimal debt reserve are discussed. A simple three period model is the basis for the analysis.