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What Are Funding Operations?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 22 April 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Funding operations is a type of financial strategy that is sometimes used to exchange certain types of investments with other investments that are projected to offer a more consistent level of return over time. This approach may involve exchanging short-term investments for those with a longer commitment, or even choosing to replace variable or floating securities with some type of fixed-income securities. The general idea behind funding operations is to position the investments in a manner that is most likely to produce a reliable flow of returns that can be utilized to support the continuance of the investor’s operation.

It is not unusual for governments to use funding operations as a means of protecting the assets currently invested in one or more markets. Periodically, a review of the investments held will occur, focusing on evaluating the performance of all investments but special attention will be given to those that are considered short-term and may carry a floating rather than a fixed rate of return. From there, the process may call for trading in some of those short-term investments for ones with longer terms, a strategy that makes it easier to project the amount of returns that will be received over time, as well as when those returns will be received. This is especially important if the returns from those investments are needed to maintain the operations of one or more departments or agencies.

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One way to understand how funding operations function is to consider an investor who currently owns several short-term bond issues that are structured with a variable or floating rate of interest. Some of the bonds do not pay until the maturity date, while others provide periodic payments based on the current average interest rate. By evaluating the future movement of the economy, the investor may find that trading these short-term bonds for long-term bonds that are equipped with fixed interest rates, it may be possible to eventually enjoy a greater return. In addition, of the acquired long-term bonds also offer periodic payments based on those fixed rates, it is easier for the investor to project the amount of income that will be received, when the payments will be issued, and be able to use those funds to cover various expenses.

While funding operations can be an effective way to arrange investments to ensure a steady flow of revenue, this approach may or may not be in the best interests of the investor over the long-term. In order to decide if this strategy is viable, the investor accurately projects market movements that affect the investments as well as the rate of interest that is paid on the assets currently in hand. From there, comparing those projected returns with what could be realized by going with longer-term investments with fixed rates will make it possible to decide when scenario offers the greatest benefits and should be pursued.

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