There is a section of the Kaplan materials in LOS 23c (reading 23 lia-driven & index based strategies) and one problem says a company wants to retire some of its debt early. They walk through first the possibility of a tender offer but this option isn’t viable because the price would be too high. Then they introduce the idea of setting up a portfolio of gov bonds which would create a cash-flow matching portfolio, which could be removed from the company’s balance sheet. But they also tell you this option is ‘too costly’ as well. So the solution is to use a duration-matching portfolio instead, with corporate bonds.
I think I’m missing the reason a duration-matching portfolio is the solution here, why its less costly to set up, etc. What are a few examples of what situation would best call for a dur-matching vs a CF-matching portfolio to address your liabilities? Maybe I just did a poor job of reading but I didn’t think the LOS was very clear on these questions…
thanks!