The debt service and the revenues in a city government are $3.1 million and $30 million, respectively.

1. What is the debt service ratio? If the benchmark debt service ratio is12 percent, does the city have additional debt capacity? Assume an annual interest rate of 5 percent and a twenty-year maturity for the debt, how much additional debt can the city carry?

The city’s debt service ratio is 10.33 percent. Because the benchmark ratio is set at 12 percent, the city has additional debt capacity. The additional debt service is $500,000, and the additional debt capacity is $6,231,105 with specified terms.

2. Assume an annual interest rate of 4 percent and a twenty-year maturity for the debt, how much additional debt can the city have?

The additional debt capacity is $6,795,163

3. Assume an annual interest rate of 5 percent and a thirty-year maturity for the debt, how much additional debt can the city carry? Compare the results of the additional debt capacity amounts in the above three different circumstances in interest rate and maturity. Explain why they differ.

The additional debt capacity is $7,686,226. Lower interest rates and/or longer maturity terms increase additional debt capacity. The city can borrow more when the interest rate is lower and the maturity is longer.

4. If the benchmark debt service ratio is 10 percent, does the city have additional debt capacity? Why or why not?