Bank Guarantee

Finance, a la shmoop. What is debt service and debt service ratios? Well debt

service is just the interest you pay on debt in a given year. Like you're [Definition written on a 100 dollar bill]

servicing the debt, like think about the oil demanded by a robot in a year she

demands to be serviced and the oil you serve her will you know quench her [Robot drinking oil]

thirst. Well debt service can be easy or it can

be hard, like whatever.com has 50 million bucks of 6 percent debt costing 3 [The debt service calculation is shown]

million a year to service. Well if whatever.com had 40 million bucks in [Vault full of money]

cash profits servicing its debt would then be easy and it would have a debt [Someone repeatedly pressing an easy button]

service ratio of 40 over 3 or 13 and 1/3 times coverage. Said another way the odds [The ratio calculation is shown]

that whatever.com would find itself in a position that it couldn't service

its debt are well very low. But think about the other side of the coin if [Somone about to flip a coin]

whatever.com had only 4 million dollars in cash profits well then it's debt

service ratio is 4 over 3 meaning that 75% of its cash flow leaves the company [Money going from whatever.com to the lenders]

and goes into the coffers of the kindly loving lenders who are nervous about the

company falling into default and going bankrupt which does not make the oil go

down easy... [Robot drinks oil and spits it out]