How to Calculate Annual Debt Services at Different Interest Rates

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Calculating annual debt service is a relatively straightforward technique using a standard spreadsheet program. It is important to remember that debt service includes redemption values. Testing debt service at different interest rates is easy with the program described below.

Things You'll Need

• Computer spreadsheet program

Instructions

1. Create a column listing the principal amount of debt outstanding from each bond and note the company issued. Note if any principal is to be redeemed during the course of the fund. Below the debt outstanding make another list of any preferred stock to be redeemed.

2. Use a second column to note the rate of interest paid for all fixed rate debt. In a third column compute the number of days the rate was in force as a portion of the year. For variable rate debt such as short term debt or bank borrowings you must calculate the rate and the proportionate part of a year the rate was in effect. Always assume 30-day months unless the loan documents state otherwise. Thus a loan of 270 days would be entered in column three as .75.

3. Multiply the interest rate in column two and the principal amount in column one. Place the result in column four. Label this column 'Fixed Rate Charges'. Multiply the 'Fixed Rate Charges' by column three and label the result in column five, 'Net Interest Paid'.

4. Sum the total of all the calculations in column five. This is the total amount of cash needed to cover all debt service. Multiply this sum by your effective tax rate to determine your net cash flow. Remember that preferred debt payments are not tax deductible.

5. For different interest rates simply substitute values as desired in column two. For projecting debt service in future years be certain to adjust for redemptions. Remember that if interest rates decline enough you may be able to redeem the entire issue and refinance at better rates. This would result in permanently lowering of debt service requirements.