Question

What are the advantages of matching the maturities of assets and liabilities? What are the disadvantages? Why? Respond in at least 200 words.

Answer 1

Advantages:

*The cash flows from the assets over its life can be used to service or redeem the liabilities which are of similar maturities.

*The long term solvency of the firm is ensured. If long term assets are financed by short term liabilities, there would always be stress on the cash flows and a need to refinance the short term liabilities as an when they mature.

*Working capital management can be given better attention as it requires day to day monitoring of cash inflows and outflows.

Disadvantages:

*Long term liabilities are costlier and hence the cost of financing would be higher.

*The firm will not be able to take advantage of favorable interest rate movements as it would be committed to a particular interest rate. However, the firm can have hedging through derivatives.

*More restrictions on financial matters are attached to long term liabilities than short term liabilities.

*Flexibility in changing financing sources is restricted.