What role does the debt maturity mix play in the firm’s overall risk-return posture?
The debt maturity mix is an important input to a company’s levels of risk and return. In general, short-term liabilities are less costly than long-term debt, since the yield curve is normally upward sloping. However, a firm with a high level of short-term liabilities has less liquidity than one whose debt is of longer maturities. In summary, a company which weights its debt financing toward the short-term increases both its return and risk, while a company which weights its debt financing toward the long-term decreases both its return and risk. By establishing its debt maturity mix, a company can add or subtract both risk and return to its risk-return position.