Asset-liability management is the term where the maturity of an asset is similar to the time that the liability expires. Which of the following is not good asset-liability matching?
-Brand new quality car financed by a 5-year loan.
-Retirement fund for a 35-year old containing commercial real estate.
-Loan from a commercial bank to a corporate account for working capital funded by the bank's retail checking accounts (consumer's deposits in checking accounts).
-re-financing a credit card, exclusively used for grocery purchases in the amount of $1,431.49, by taking out a second mortgage on the consumer's home.
-used car purchase financed by a 3-year car loan.
The option that is not a good asset-liability matching is:
-Retirement fund for a 35-year-old containing commercial real estate.
To understand why this option is not a good asset-liability matching, we need to analyze the concept of asset-liability management. Asset-liability management aims to match the maturity of assets and liabilities to ensure that they align in terms of duration, cash flow, and risk profile.
In this scenario, the retirement fund containing commercial real estate is an asset with a long-term investment horizon. Retirement funds are typically invested in a diversified portfolio to provide income during retirement. On the other hand, liabilities associated with retirement funds, such as pensions or annuities, have long-term payment obligations.
However, commercial real estate, while potentially a valuable asset, may come with risks such as volatility in property values, liquidity constraints, and potential difficulty in converting into cash if needed to meet short-term liabilities. Therefore, including commercial real estate in a retirement fund does not align with the concept of asset-liability matching, as it introduces long-term illiquid assets into a fund intending to provide income for retirement.
To achieve an appropriate asset-liability matching, it is generally advisable to include assets in a retirement fund that have a similar investment horizon and risk profile to the corresponding liabilities. This helps to ensure that the assets can generate sufficient returns and liquidity, aligning with the objectives and timeframes of the liabilities.
In this scenario, the retirement fund containing commercial real estate does not meet the principle of asset-liability matching and is, therefore, not a good example of it.