When an investor lends money to a borrower, the investor often receives regular interest payments, and on the maturity date, receives the amount of borrowed money back, also called the bond par amount.
In the case of a fixed-rate security, both the borrower and the investor need to know what to expect as it pertains to the future payments of the security. This can be accomplished by looking at the security’s debt service. The debt service schedule allows the borrower to anticipate budgeting decisions and ensure there are enough funds on hand to meet future obligations and covenants. From the investor’s perspective, the debt service schedule allows it to map out future receipts of cash for cash flow and reinvestment planning.
Debt service schedules can be created by either using a debt management app or with spreadsheet software such as Excel.
To create a debt service schedule for a security, the following data is needed:
- Dated date
- Delivery date, which might be the same as dated date
- First interest payment date
- Interest frequency, such as annually, semi-annual, monthly, or quarterly
- Maturity date
- Coupon rate of security
To create a debt service schedule for a security, the following data is needed:
- Dated date: 2/1/2023
- Delivery date: 2/1/2023
- First interest payment date: 5/1/2023
- Interest frequency: Semi-annual
- Maturity date: 11/1/2027
Note that the actual formulas used in the table can be found below the debt service table.
The same formulas can be used if there are multiple bonds in the debt service table.
What’s important here?
Debt service schedules display the future principal and interest payments of a security. This information is important to both the borrower and the investor, as it can help them plan and budget for the future. The debt service schedule can be created either in debt management apps or in an Excel model.
