Zayed Company business case study

Zayed Company currently has a mortgage on its office building through a savings institution. It is

attempting to determine whether it should convert its mortgage from a floating rate to a fixed rate.

Recall that the yield curve is currently upward sloping. Also recall that Zayed is concerned about a

possible slowing of the economy because of potential Fed actions to reduce inflation. The fixed rate

that it would pay if it refinances is higher than the prevailing short-term rate, but lower than the rate it

would pay from issuing bonds.

a. What macroeconomic factors could affect interest rates and therefore affect the mortgage refinancing

decision?

b .If Zayed refinances its mortgage, it also must decide on the size of a down payment. If it uses more

funds for a larger down payment, it will need to borrow more funds to finance its expansion. Should

Zayed use a minimum down payment or a larger down payment if it refinances the mortgage?

c. Who is indirectly providing the money that is used by companies such as Zayed to purchase office

buildings? That is, where does the money that the savings institutions channel into mortgages come

from?

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