Question: Carson 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 Carson 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.
• What macroeconomic factors could affect interest rates and therefore affect the mortgage refinancing decision?
• Which type of mortgage risk is the most difficult to overcome, in your opinion? Why?