Debt Service Coverage Ratio (DSCR): Evaluating Revenue Bond Credit Safety
A municipal toll expressway authority generates $45 million in gross toll revenues. It incurs $15 million in operating and maintenance expenses during the fiscal year. Annual debt service requirements on its outstanding revenue bonds consist of $6 million in interest and $4 million in principal amortization. What is the expressway authority's Debt Service Coverage Ratio (DSCR)?
DSCR = Net Revenue / Total Debt Service = ($45M - $15M) / ($6M + $4M) = $30M / $10M = 3.0x.
Complete Analysis & Legal Rationale
The Debt Service Coverage Ratio (DSCR) is the primary quantitative metric used to analyze the credit risk of municipal revenue bonds. It measures how many times annual net project revenues cover annual principal and interest obligations: Gross Revenues ($45M) - Operating & Maintenance ($15M) = Net Revenue ($30M). Total Debt Service = Interest ($6M) + Principal ($4M) = $10M. DSCR = $30,000,000 / $10,000,000 = 3.0x. A ratio well above 1.0x indicates substantial safety.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
DSCR = Net Revenue / Total Debt Service = ($45M - $15M) / ($6M + $4M) = $30M / $10M = 3.0x.
Fails to adhere to municipal bond rules regarding B.
Fails to adhere to municipal bond rules regarding C.
Fails to adhere to municipal bond rules regarding D.
Official Standard: The Debt Service Coverage Ratio (DSCR) is the primary quantitative metric used to analyze the credit risk of municipal revenue bonds. It measures how