Question

1) a) What is the “maturity” of a bank asset or liability?

b) How do non-financial firms tend to structure the maturities of their assets relative to bonds used to fund the asset purchases (I.e., do they match maturities, use S-T debt to fund L-T assets, or visa-versa?)

  c) How does your answer to “b” differ for commercial banks? What is the reason for this difference?

(BONUS­): Provide an example to illustrate why the anticipated maturity of an asset and/or liability can differ from its actual maturity.

Answer 1

a. Maturity of a bank asset or a liability is simply the time duration (i.e. how long) that it takes for the interest rate to change. It is the time with regards to the reset of the interest rate.

b. Non-financial firms structure the maturities of their assets relative to bonds used to fund the asset purchase by matching maturities. They can use S-T debt but they do not do so in order to avoid interest rate risk.

c. Commercial banks make use of LT assets and ST liabilities. The reason for this is that banks make money from the net interest margin earned by them and hence it is generally more profitable for them to fund the LT assets through ST liabilities. This will give them with an upward sloping yield curve and this will help them earn higher interest income.