Funding Operations

You have piled up a lot of credit card debt. The high-end kitchen appliances, the fun nights out you barely remember, the trip to St. Thomas...all that stuff added up, and now you're maxed out, spending most of your disposable cash on interest charges.

Your parents offer to bail you out. They will loan you the money to pay off your credit cards and you can pay them back slowly, over a five-year span at a steady 5% interest rate. You agree, and vow to change your profligate spending (the promise causes your parents to look at each and smirk knowingly, but they appreciate the effort).

That setup represents a kind of funding operation.

In general, a funding operation involves an organization exchanging short-term debts for long-term ones. It can also involve switching floating-rate obligations for fixed-rate alternatives. The general point is that the business (or government) can get out from under a difficult debt burden and restructure it for something easier to manage.