Q: Why do you need to use a debt service constant?
A: The debt constant gives us great precision in identifying annual debt service for any combination of interest rates, amortization periods, and payment frequency. It is very easy to use.
The associated debt constant is available via Excel formula or we provide an online worksheet.
Worksheet: Debt Service Constant
Mathematical calculation of the Debt Constant
To use the worksheet, simply enter the interest rate, the debt amortization period, and the payment frequency, e.g., annually, semi-annually, quarterly, or monthly. The Excel function will produce the debt constant for this unique combination of interest rate, amortization period, and payment frequency. Multiply the debt constant by the loan amount to arrive at the annual debt service amount.
When the annual debt service has been determined in this way, simply divide the annual debt service by the number of payments that you’ve specified in your input. Divide by 12 for monthly debt service payments, divide by 4 for quarterly payments, and divide by 2 for semiannual payments. Use the value produced by the worksheet – prior to any division – for annual payment frequency.