Debt Service Reserve Fund as a Response to Repayment Risk

Madhab R. Khoju, Carl Nelson () and Peter J. Barry

Review of Agricultural Economics, 1993, vol. 15, issue 2, 217-232

Abstract: 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.

Date: 1993
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