Define each of the following terms: d. Current asset financing policies: maturity matching, aggressive, and conservative
Define each of the following terms:
Maturity matching approach - It states that assets (permanent and temporary) should be financed with the financial instruments that have the same maturity period.
Moreover, under this approach, permanent current assets are financed through long-term debt, but temporary current assets are financed through short-term debt.
Aggressive approach - It states that temporary current assets as well as a reasonable part of fixed assets should be financed through short-term debt.
It is a highly risky policy because companies have insecurities regarding loan renewal and increasing interest rates.
Conservative approach - It states that all permanent current assets as well as a part of temporary current assets should be financed through long-term debt.
It is a risk-free policy because companies maintain high-level current assets and therefore a higher level of working capital.
Moreover, companies use short-term debt in case of high demand and thus, maintain those funds in short-term marketable securities.