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Asset swapping is a useful strategy to align a company’s current liabilities with its assets and make it more attractive to lenders. It involves exchanging fixed assets for floating assets to create a gross margin, and can be particularly useful with interest-bearing bonds.
As a means of helping a company’s cash flow run more efficiently relative to the current liabilities held by the organization, asset swapping is a great way to use interest rates to the best advantage. Asset swapping involves the creation of a package that includes some form of cash credit asset or medium and an exchange of assets of equal value to create a floating interest rate instrument. More simply, in an asset swap, a fixed asset is manipulated to become a floating asset.
Sometimes referred to as an asset swap, an asset swap is particularly useful with interest-bearing bonds. Using the asset swap method to exchange two different types of bonds can create what is known as a gross margin. This gross margin is arrived at by calculating bond cash flow values, assuming zero rates are applied to the bond. With the numerical amount of the gross spread applied to the value of the bond being used in the exchange, this creates a situation where the calculated value of the bond becomes equal to the market price that the bond can currently command.
The application of an asset swap can be useful when there is a desire to align the company’s current liabilities with the value of the assets controlled by the organization. Employing this strategy when preparing to seek additional financing for a merger or expansion project will help make the company more attractive to lenders. In general, the positive aspects of the current portfolio of assets will be more visible and will demonstrate the competence of the finance team to make the best use of those assets. With the implication that both the company’s finances and the staff who control those finances are up to the task of repaying the loan on time, obtaining financing is an easier process.
While an asset swap is not necessarily the most productive financial strategy in all situations, it is worth the time and effort to verify the feasibility of using this method to maximize the efficiency of all assets relative to the liabilities of the company. company. At the very least, an attempt to prepare for a potential asset swap will necessitate a thorough review of the status of each asset currently under the company’s control. A clear understanding of the corporation’s current financial situation is always helpful, and may lead to the conclusion that an asset swap is in the corporation’s best interests.
Smart Asset.
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