A common example of cash-flow matching is:

A) using current revenue to pay current debts
B) only buying investments, using cash available without borrowing
C) legal defeasance
D) none of these choices

Question

A common example of cash-flow matching is:

A) using current revenue to pay current debts
B) only buying investments, using cash available without borrowing
C) legal defeasance
D) none of these choices

Quizplus · Accepted Answer

A common example of cash-flow matching is legal defeasance.Debt can be removed from the balance sheet where risk-free assets are purchased that exactly match the cash flows arising from the debt.For example;liability cash flows may approximate cash flows generated by bonds freely available in the market.In this case,the required bonds are purchased and the cash flows from coupon payments and principal payment are used to meet the liability as it falls due.

A Common Example of Cash-Flow Matching Is