Chapter EMA, Problem 2MCQ

To determine

To state: The term that is used for converting short-term liabilities into long-term assets.

Answer to Problem 2MCQ

The correct option is A i.e. maturity transformation.

Maturity transformation is defined as the exercise followed by financial institutions wherein they borrow money for a shorter time as compared to lending money. Financial markets also have the result of maturity transformation wherein investors such as bondholders and shareholders can sell their bonds and shares in the secondary market at any time without upsetting the company that issued the bonds or shares.

So, the company could be a borrower for the long term from short-term lenders.

Short-term moneylenders are just selling and buying the possession of bonds or shares in the stock market.

The company maintains a record of owners and alters the name whenever there is a sale.

So, the term that is used for converting short-term liabilities into long-term assets is Maturity transformation.

Explanation of Solution

Maturity transformation is defined as the exercise followed by financial institutions wherein they borrow money for a shorter time as compared to lending money. Financial markets also have the result of maturity transformation wherein investors such as bondholders and shareholders can sell their bonds and shares in the secondary market at any time without upsetting the company that issued the bonds or shares.

So, the company could be a borrower for the long term from short-term lenders.

Short-term moneylenders are just selling and buying the possession of bonds or shares in the stock market.

The company maintains a record of owners and alters the name whenever there is a sale.

So, the term that is used for converting short-term liabilities into long-term assets is Maturity transformation.