# Estimating Returns and Deciding on Refinancing

OVERVIEW: Complete a 2–4-page, two-part assessment addressing two different hypothetical scenarios. In Part 1, apply a probability analysis in estimating returns for a company. In Part 2, recommend whether or not to refinance a home.

RESOURCES:

• Parameswaran, S. (2011). Fundamentals of financial instruments: Stocks, bonds, foreign exchange, and derivatives. Hoboken, NJ: John Wiley & Sons.
• Chapter 9: Mortgages and Mortgage-Backed Securities.
• Gibson, R., Michayluk, D., & Van de Venter, G. (2013). Financial risk tolerance: An analysis of unexplored factors. Financial Services Review, 22(1), 23–50.
• Mansur, I., Odusami, B., & Nasseh, A. (2011). The relationship between money market mutual fund maturity and interest rates. Journal of Financial Service Professionals, 65(4), 58–66.
• Woodford, M. (2010). Financial intermediation and macroeconomic analysis. Journal of Economic Perspectives, 24(4), 21–44.
• Downes, J., & Goodman, J. E. (2014). Dictionary of finance and investment terms (9th ed.).Hauppague, NY: Barron’s.
• Brigham, E. F., & Houston, J. F. (2013). Fundamentals of financial management (13th ed.). Mason, OH: South-Western Cengage Learning.

INSTRUCTIONS:

This assessment consists of two parts, each of which includes a hypothetical situation for you to respond to.

Part 1. Estimating Returns

Imagine the following scenario:

A company is faced with a 20 percent chance of a poor economy, a 40 percent chance of an average economy, and a 40 percent chance of an above-average economy. The company would expect only a 10 percent return in a poor economy, an 18 percent return in an average economy, and a 30 percent return in an above-average economy.

Use the hypothetical situation above to answer these questions to demonstrate the use of probability analysis in estimating returns:

• What would the expected return be for this company?
• What would the standard deviation be for this company?
• How does the standard deviation help you better understand what to expect in terms of a return?
• Use at least two resources to support your ideas.

Part 2. Deciding on Refinancing

Changing interest rates create opportunities for home owners to gain advantage by refinancing their homes. For this part of the assessment, use the following scenario to consider this issue.

Imagine you have a \$100,000 mortgage. Your current loan is at 7 percent with 14 years left, negotiated one year ago and involving \$2,000 in closing costs. You are considering refinancing at 5.5 percent for 15 years. The closing costs would be \$1,500.

Complete a 1–2 page evaluation of the refinancing possibility.

• Would you decide to refinance? Why or why not?
• What qualitative considerations would you consider in your decision to refinance or not refinance?
• Provide examples of calculations you would use to help you make your decision. In addition, use at least two resources to support your ideas.