What does maturity matching mean, and what is the logic behind this policy?

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What does maturity matching mean, and what is the logic behind this policy?

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What does maturity matching mean, and what is the logic behind this policy?

Explanation & AnswerSolution by a verified expert

Explanation

The maturity matching principle 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.
 
The logic behind this policy is to reduce the risk of fluctuations in the interest rate during refinancing as fixed assets are financed through long-term debt and current assets are financed through short-term debt. Moreover, by implementing this policy the cash flows generated through assets will occur at the same time as the debt obligation.

Verified Answer

According to the maturity matching policy, the current assets are financed through short-term liabilities whereas the fixed assets are financed through long-term liabilities.
The motive behind this principle is to decrease the fluctuations in the interest rate. Also, under this principle, the liquidity of the business is guaranteed and the risk of default is avoided.

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