Question

Why is the debt maturity mix normally simplified to short- versus long-term debt?

What, if anything, is lost in making this simplification?

Answer 1

This simplification is normally made tobe consistent with the way assets and liabilities are categorized on the balance sheet.However, simplifying in this way hides the opportunity, and need, to consider a much finerhedging of assets and liabilities. For example, an asset that will turn to cash in one month isgenerally not a good hedge for ten-month debt, yet both would appear on the balance sheet ascurrent items. An asset with a 30-year life is generally not a good hedge for thirteen-monthdebt, yet both would appear on the balance sheet as long-term. It is important to look beyondthe simplicity of the balance sheet classification and examine the maturities of assets and liabilities in more detail.