Debt service fund

A debt service fund is a cash reserve that is used to pay for the interest and principal payments on certain types of debt. The existence of a debt service fund is intended to reduce the risk of a debt security for investors, which makes it more attractive to them and also reduces the effective interest rate needed to sell the offering. However, it ties up a portion of the cash that the debt issuer receives from the debt offering, so that it cannot be applied to more useful investments.