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Terms in this set (98)
Both home prices and sales volume will be highest in the summer
Which of the following statements is true
The investor will not buy the restaurant
A restaurant is for sale for $200,000. It is estimated that the restaurant will earn $20,000 a year for the
next 15 years. At the end of 15 years, it is estimated that the restaurant will sell for $350,000. Which
of the following would be MOST LIKELY to occur if the investor's required rate of return is 15%?
A property produces a rst year NOI of $100,000 which is expected to grow by 2% per year. If
the property is expected to be sold in year 10, what is the expected sale price based on a terminal
capitalization rate of 9.5% applied to the eleventh year NOI?
Capital gains or losses
Net sale proceeds less adjusted basis of the property determines which of the following?
A property that produces a rst year NOI of $80,000 is purchased for $750,000. The NOI is expected
to increase by 15% in the sixth year when some of the leases turnover. The resale price in year 10 is
expected to be $830,000. What is the NPV of the property based on the 10-year holding period and a
discount rate of 9.5%?
American depository receipts
Which of the following is NOT a major type of mortgage-related security?
Decrease the market value of the MPT
A rising rate of market interest would have which of the following impacts on a mortgage pass-through
Lower than the average rate of interest on the underlying mortgage pool
The pass-through rate is the coupon rate of interest promised by the issuer of a pass-through security
to the investor. In most instances, the pass-through rate is:
Real estate investment returns are not highly correlated with returns for stocks
Including REITs in a portfolio containing S&P 500 securities produces diversication benets. Why?
One would see the greatest amount of diversication from two securities that are:
The legislation that created US REITs was passed in
An FHA mortgage
Suppose that you want to buy a home but don't have very much money for a down payment. Which
of the following mortgage types are you most likely to get?
Absent mortgage insurance, what is the usual maximum LTV on a loan to purchase a single-family
owner-occupied property such that Fannie and Freddie can buy the loan?
Prevent the lender from having recourse to the borrower, other than taking the
In a mortgage, an \exculpatory clause" typically is used to:
The ARM borrower bears more interest rate risk, but the ARM lender bears less
interest rate risk, than with the FRM.
In comparing an adjustable rate mortgage (ARM) with a xed rate mortgage (FRM):
Consider a 25-year (monthly-payment), 7%, $80,000 fully-amortizing mortgage with 1 point prepaid
interest up front. What is the yield to maturity?
In the mortgage in the previous question, what is the "eective interest rate" or yield over the borrowers
expected holding period if the borrower expects to hold the loan for 7 years?
If you borrow using an ARM, your interest rates are more likely to rise than fall in
Which of the following is true when the yield curve is steeply rising:
REITs own the highest share of institutional commercial real estate in which of the following asset
They have to pay out 90% or more of their annual taxable income in dividends.
US REITs don't have to pay corporate income taxes, but in return they face what major restriction?
Which type of property do you expect will have the highest ?
None of the above
Which of the following is true about the conforming loan limit?
A mezzanine loan
Which of the following is likely not permitted on a commercial mortgage that will go into a CMBS?
Debt Yield, Debt Service Coverage Ratio, Loan-to-Value
which of the following is a standard underwriting metric commercial lenders consider?
Given the following information, calculate the eective gross income. Property: 4 oce units, Contract
rents per unit: $2500 per month, Vacancy and collection losses: 15% of PGI, Operating Expenses:
$42,000, Capital Expenditures: 10% of PGI
It relies to a smaller degree on bank deposits as a source of financing
The US residential mortgage financing system is unique relative to other industrialized countries in
A provision in a promissory note that allows cash
flows from a property to
flowdirectly to the lender if certain performance standards are not met, even if the loan
is not in default
What is a soft lock box?
During the summer when interest rates have fallen since origination
Under which of the following set of circumstances do you expect prepayment on a pool of residential
mortgages to be highest?
A provision in a commercial mortgage that makes the loan recourse if the borrower
declares bankruptcy or makes misrepresentations during underwriting
What is a bad boy clause?
In which decade did the United States first see securitization of mortgages on office property?
50 basis points.
1. An adjustable rate mortgage is offered with an initial interest rate of 7.00%. The index is currently yielding 5.50%, and the margin is 200 basis points. What is the size of the "teaser"?
1. In the ARM above, what will be the contract interest rate after the end of the first adjustment interval if the index remains at 5.50%?
A declining neighborhood where property values are likely to decline.
1. A graduated payment mortgage (GPM) would be most appropriate in all of the following circumstances except:
1. Consider a 7% loan amortizing at a 30-year rate with monthly payments. What is the maximum amount that can be loaned on a property whose net operating income (NOI) is $1,000,000 per year, if the underwriting criteria specify a debt service coverage ratio (DCR) no less than 120%?
1. For the same property as above, suppose the underwriting criteria is a maximum loan/value ratio (LTV) of 80%, and we estimate property value by direct capitalization using a rate of 8% on the stated NOI. By this criterion what is the maximum loan amount?
The ARM borrower bears more interest rate risk, but the ARM lender bears less interest rate risk, than with the FRM.
1. In comparing an adjustable rate mortgage (ARM) with a fixed rate mortgage (FRM):
The Promissory Note and the Mortgage Deed.
1. The two legal documents which constitute a mortgage loan include:
a) Allows the lender to make the full outstanding balance due immediately.
1. An acceleration clause:
$4 Million to the first mortgage lender, $1 Million to the second mortgage lender, and none to the third.
1. A building that is worth $5 Million has a first mortgage on it with $4 Million owed, a second mortgage with $2 Million owed, and a third mortgage with $1 Million owed. Which describes the distribution of the $5 Million proceeds from the foreclosure sale?
Prepayment of loans
1. What is the main factor which can cause the Weighted Average Maturity of the A tranch of a CMBS issue to be lower (shorter) than lower tranches?
1. Consider an 8.5% loan amortizing at a 25-year rate with monthly payments. What is the maximum amount that can be loaned on a property whose net operating income (NOI) is $500,000 per year, if the underwriting criteria specify a debt service coverage ratio (DCR) no less than 125%?
1. For the same property as above, suppose the underwriting criteria is a maximum loan/value ratio (LTV) of 75%, and we estimate property value by direct capitalization using a rate of 11% on the stated NOI. By this criterion what is the maximum loan amount?
Allow a subsequent buyer of the property to assume (take over) the mortgage.
1. If a mortgage has a "Due-on-Sale" clause, the borrower would not be able to:
Prevent the lender from having recourse to the borrower, other than taking the collateral property.
1. In a mortgage, an "exculpatory clause" typically is used to:
1. Consider a 20-year (monthly-payment), 8%, $80,000 mortgage with 2 points prepaid interest up front. What is the yield to maturity?
1. In the mortgage in the previous question, what is the "effective interest rate" or yield over the borrower's expected holding period if the borrower expects to hold the loan for 12 years?
1. How much is the previous mortgage worth in the secondary market if the prevailing YTM in that market is 7.75%? (Assume the loan is held to maturity.)
1. Suppose the market yield on mortgages is 9.0% in bond equivalent terms (BEY, or "coupon equivalent", CEY). What is the effective yield (EAY or EAR)?
1. For the situation described in the problem above (i.e., where the BEY is 9.0%), what is the "mortgage equivalent" yield, or the "nominal" annual rate (ENAR) with monthly payments on the loan?
If you borrow using an ARM, your interest rates are more likely to rise than fall in the future.
1. Which of the following is true when the yield curve is steeply rising:
The optimal risky asset portfolio should always be mixed with investments in riskless bonds.
1. According to Portfolio Theory all the following statements are true when there is a riskless asset except:
9.5% return, 5% Volatility
1. If the expected return to a risky portfolio is 12% with standard deviation 10%, and if the return to the riskless asset is 7%, then the expected return and Volatility for a portfolio consisting of (1/2) riskless bonds and (1/2) the risky portfolio would be:
Borrow an amount equal to 50% of your wealth and put 150% of your wealth in the risky portfolio.
1. In a world where riskless borrowing or lending is possible at 6%, if the expected return to the optimal risky asset portfolio is 12%, and you want a target return of 15%, what must you do?
1. If the riskfree interest rate is 5%, the market price of risk is 6%, and the beta is 0.5, then, according to the classical single-factor CAPM, what is the equilibrium expected total return for investment in the asset in question?
Real estate's classical CAPM "beta" with respect to the stock market is nearly zero, yet real estate seems to command a significant ex ante return risk premium.
1. The traditional "complaint" about applying the CAPM to real estate is:
Volatility of P < (1/2)(Volatility of A) + (1/2)(Volatility of B)
1. If A and B are two risky assets that are less than perfectly correlated, and P is a portfolio with 1/2 its value in A and 1/2 its value in B, then:
An asset's own return variance measures the asset's total risk and its covariance with a portfolio measures its potential contribution to the risk in that portfolio.
1. Regarding time-series second moments of periodic investment returns data, relevant to portfolio investment analysis:
They have to pay out 90% or more of their annual taxable income in dividends.
1. REITs don't have to pay corporate income taxes, but in return they face what major restriction?
Unsecuritized property prices will probably fall in the upcoming year.
1. Suppose REIT share prices have plunged 25% in the past year. Then it is reasonable to expect:
1. REITs use a metric similar to NOI (for individual properties) of which they must distribute at least 90% as dividends to qualify as a REIT. What is this measure?
1. If real estate has an expected return of 10% and stocks have an expected return of 15% then what would be the expected return of a portfolio consisting of 80% real estate and 20% stocks?
Buy a diversified mixture of risky assets and also invest in Government bonds.
1. According to Portfolio Theory if you do not want to bear much risk:
Modern portfolio theory (MPT) is most useful for strategic analysis and equilibrium asset price modeling (such as the CAPM) is most useful for tactical analysis.
1. Which of the following is true about analytical tools useful in "strategic" (long horizon, big picture) and "tactical" (shorter horizon, more specific) investment policy analysis for portfolio management?
It is irrelevant because it can be diversified away
1. What is the CAPM's basic treatment of idiosyncratic risk?
1. If an asset has expected return 12%, standard deviation 10%, and T-Bills return is 8%, then its "Sharpe Ratio" is:
A REIT that owns property only indirectly, through its holdings in a partnership.
1. What is meant by the term "umbrella partnership REIT" (or "UPREIT")?
Property market prices will probably rise in the upcoming year.
1. Suppose REIT prices have risen strongly for two consecutive years. It is reasonable to expect:
An investor who has $75,000 in taxable income purchases a building that produces another $15,000 in taxable income. According to the table below, what is the marginal tax rate?
A small office building is purchased of $1,200,000 with a balloon mortgage that is due at the end of year 10. Payments are based on a 25 year amortization period. If one point was charged, what annual amount can be deducted for tax purposes?
Which of the following includes income from real estate classified as capital assets?
It is not of concern to lenders when loan to value ratios are low
Which of the following is FALSE regarding DCR?
A borrower wants a fixed rate loan, but the bank only offers floating rate loans; the borrower "swaps" loans with someone who has a fixed rate loan
Under which conditions would one be MOST LIKELY to see an interest rate swap?
higher average return, higher risk
All other things being equal, which of the following best describes the effects of leverage on an investment's risk-return characteristics (assuming the expected return is greater than the lending rate)?
A loan in which the lender receives a percentage of the net operating income from the property is known as a(n):
A loan in which the lender has an option to purchase an equity interest in a property is known as a(n):
The land may appreciate over the holding period
Which of the following would NOT be considered an advantage that an investor might consider under a sale-leaseback of land?
Which of the following is also referred to as a negative amortization loan?
If properly constructed and assuming everything but the structure of the interest payment is equal, which of the following loans would typically have the highest first-year debt service?
Which of the following typically would NOT be used as a basis for a participation loan?
The land value may increase over the holding period
Which of the following is NOT a benefit of a sale-leaseback of land for investors?
They have greater amortization than conventional loans
Which of the following is FALSE regarding interest only loans?
Which of the following gives the lender an option to purchase a full or partial interest in the property at the end of some specified period of time?
It usually has a lower interest rate than a conventional loan
Which of the following is FALSE regarding negative amortization
American depositary receipts (ADRs)
Which of the following is NOT a major type of mortgage-related securities?
Decrease the market value of the MPT
A rising rate of market interest would have which of the following impacts on a mortgage pass-through security
Increase prepayments on loans in the pool
A falling rate of market interest would have which of the following impacts on a mortgage pass-through security?
Manage all secondary mortgage market operations
The Government National Mortgage Association (GNMA) was organized to perform three principal functions. Which of the following is NOT a function of GNMA?
Overcollateralization of the mortgage pool assures investors that the income from mortgage will be sufficient to pay the interest on bonds and the principal upon maturity
Which of the following statements regarding mortgage-backed bonds is generally TRUE?
The amount of overcollateralization of the mortgage pool
When evaluating an investment in a mortgage pass-through security, which of the following is NOT one of the characteristics of the underlying mortgage pool that should be considered
Lower yields, because of lower prepayment risk
Compared to mortgage pass-though securities (MPTs), MBBs should be priced to provide:
All mortgages would be paid off at maturity
Which of the following is NOT a guarantee of Ginnie Mae (GNMA)?
Their maturity is indefinite at issuance
Which of the following is FALSE regarding mortgage-backed bonds (MBBs):
Prepayment is the key risk with residential mortgages; default is the key risk with commercial mortgages
What is the primary distinction between mortgage-related securities backed by residential mortgages and those backed by commercial mortgages?
Subprime mortgages are not Ginnie Mae guaranteed, so CMO investors are exposed to default risk
Which of the following statements regarding subprime mortgages is TRUE?
If a capital gain is realized, the REIT can retain the gain for future investment and be taxed at the appropriate corporate capital gains tax rate
Which of the following is likely to occur upon the sale of a REIT-owned property?
The standard deviation of returns divided by the mean return
The coefficient of variation of the returns, also known as the risk-to-reward ratio, is defined as:
Holding period return (HPR)
The unit of measure that is used by portfolio managers to measure returns for individual securities on a periodic basis is the:
A building & loan association
The movie \It's A Wonderful Life" depicts a run on which of the following types of institutions?
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