What are the advantages of matching the maturities of assets and liabilities? What are the disadvantages?

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What are the advantages of matching the maturities of assets and liabilities? What are the disadvantages?

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What are the advantages of matching the maturities of assets and liabilities? What are the disadvantages?

Explanation & AnswerSolution by a verified expert

Explanation

The maturity matching policy states that the assets should be financed with the financial instruments that have the same maturity period.
 
Advantages for adopting maturity matching policy are:

It ensures that the firms borrow the funds only when required.
It reduces the risks of fluctuations in the interest rate during refinancing as the fundamental principle of finance is followed here.

 
Disadvantages for adopting maturity matching policy are:

It is difficult to implement because one cannot precisely predict at what time sales will take place or debtors will pay.
The analytics and risks that the firms are trying to avoid by the implementation of this strategy will persist if assets are not realized on time and as a result, the firm will move towards an aggressive or conservative approach.

Verified Answer

Advantages of maturity matching policy -

No wastage of funds - Under this policy, the funds are effeciently utlilized.
Reduction in fluctuations - Under this policy, the problem of frequent refinancin does not exists.

Disadvantages of maturity matching policy -

Unpredictable - The exact matching of assets with the source of finance is impossible.
Riskier - Under this policy, the business risk that the firm tries to avoid comes into play.

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