Question

2) Explain the Asset Liability funding strategy. What is the difference between the money markets and the capital markets? Explain ownership with respect to fixed income and equity instruments. With respect to equities, what does residual claim and limited liability imply?

Answer 1

Asset liability funding strategy is a strategy that manage the financial risk which arise through mismatch which exists between the asset and liability as a part of investment strategy in financial management.

capital Markets are the markets which are used for funding long term capital requirements while money markets are used for funding short term capital requirement which are most of working capital in nature. capital markets consist of debt markets as well as equity Markets and the volume trading is basically high in capital market than money market.

fixed income has a fixed stream of income attached to it while equity shares does not have any fixed stream of income attach to it because these are the ownership rights which gives a right on profit of the company. While fixed income or type of debt instruments security which is able to generate uniform rate of return.

with regards to equity, shareholders are said to have the residual claim in the case of the bankruptcy of the firm as all such debtholders and other stakeholders are to be paid first while share holders are to be paid last. Shareholders generally do have limited liability because any losses cannot be paid out of their personal property.