Question

What is maturity matching? Reflect how maturity matching is done.

Answer 1

From an organizational context maturity matching refers to a strategy where the firm will match the maturity or lifetime of assets with the maturity of the financing.In maturity matching the firm will try to acquire short term assets by means of short term financing(short term liabilities) and long term assets through long term financing(liabilities). The fixed assets of the firm will be financed using long term liabilities while the working capita needs for the short term will be acquired via short term financing.Maturity matching will allow firms to save on the interest rate when they decide to finance short term asset with short term financing rather than long term financing.An example of maturity matching :Assume a firm needs an asset which will last for 15 years.The firm has two financing options a 15 year loan or a 1 year loan that an be renewed every year.The firm will opt for the fifteen year loan.Now assume the firm needs $100,000 for 6 months the firm has two options a long term loan of 5 years or a line of credit for 6 months ,the firm will opt for the line of credit.