Debt Service Reserve Fund (DSRF) plan, proposed by Baker (1976), has appeal to both the borrower and the lender as a response to repayment risk. This plan proposes that the borrower and lender establish a pool of liquidity for the exclusive purpose of debt service. For implementation of this plan, DSRF size and other design specifications must be acceptable to both parties. Theo·retical models are developed to determine optimal DSRF sizes for the lender and the borrower. The application potential of the model is demonstrated in real lending situations. The sensitivity of the optimal DSRF sizes is also investigated with regard to distributional assumptions made on the stochastic returns generated from loan usage.