Asset trading, or asset swapping, can help improve a company’s cash flow by creating a package that includes a cash medium or credit asset and a swap of assets of equal value to create a floating interest rate instrument. This strategy can be useful in bringing current liabilities in line with assets and making the company more attractive to lenders. Testing the feasibility of an asset swap is worth the effort to maximize asset efficiency.
As a means of helping a company’s cash flow function more efficiently in relation to the current liabilities held by the organization, asset trading is a great way to make better use of interest rates. The asset swap involves creating a package that includes some sort of cash medium or credit asset and a swap of assets of equal value to create a floating interest rate instrument. More simply, in an asset trade, a fixed asset is manipulated to become a floating asset.
Sometimes referred to as an asset swap, asset swapping is especially useful with interest-bearing bonds. Using the asset swap method to trade two different types of bonds can create what is called a gross spread. This gross spread is obtained by calculating the cash flow values of the bond, assuming that zero rates are applied to the bond. With the numerical amount of gross spread applied to the value of the bond being used in the swap or exchange, this creates a situation where the calculated value of the bond becomes equal to the market price that the bond can currently command.
Applying an asset swap can be useful when you want to bring the company’s current liabilities more in line with the value of the assets controlled by the organization. Adopting this strategy when preparing to seek additional financing for a merger or expansion project will help make the company more attractive to lenders. Overall, the positive aspects of the current portfolio of assets will be more visible, as well as demonstrate the finance team’s expertise in making the best use of those assets. With the implication that both the company’s finances and the personnel who control them are up to the task of repaying the loan on time, obtaining financing is an easier process.
While an asset swap isn’t necessarily the most productive financial strategy in every situation, testing the feasibility of using this method to maximize the efficiency of all assets relative to the company’s liabilities is definitely worth the time and effort. At the very least, an attempt to prepare for a potential asset swap will require a thorough examination of the state of each of the assets currently under the company’s control. A clear understanding of the company’s current financial condition is always helpful and can lead to the conclusion that an asset swap is in the best interest of the company.
Smart Asset.
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