Deck 3: Finance Theory and Real Estate

Question 1

The discounted cash flow (DCF)model of valuation does NOT contain:

A) present value
B) internal rate of return
C) the discount rate
D) amount of the cash flows

Answer 1

internal rate of return

Question 2

Debt is given preference over equity to receive payments because:

A) debt returns a higher payment
B) equity fluctuates with the market
C) debt has legal obligations
D) there is no preference

Answer 2

debt has legal obligations

Question 3

Cash flows associated with servicing rights:

A) have little risk since the servicing fees are related to all payments
B) are not affected by market rates
C) have value and can be sold
D) are composed of the fees less the discount rate

Answer 3

have value and can be sold

Question 4

Portfolio construction allows for a reduction in risk of the portfolio over individual assets:

A) at a significant reduction in expected return
B) without a change in expected returns
C) with additional cost
D) with a reduction in cost

Question 5

A call option is:

A) the obligation to purchase an asset at the strike price before the exercise date
B) the right to sell an asset at the purchase price before the exercise date
C) the right to purchase an asset at the strike price on or before the exercise date
D) the obligation to sell an asset at the strike price before the exercise date

Question 6

Financial intermediaries:

A) lend credit to create assets for itself
B) purchase Treasury securities
C) purchase corporate bonds
D) lend credit to suppliers to create deposit.

Question 7

Options have intrinsic and market values:

A) market value is generally less than intrinsic value
B) intrinsic value is excess of the current price over the strike price for a call
C) intrinsic value is excess of the current price over the strike price for a put
D) market values and intrinsic values are the same

Question 8

Servicing rights occur when an originator of a portfolio of mortgages sells that portfolio to an investor.

A) a reasonable fee for the originator would be 7%
B) the originator continues to collect the monthly payments and delinquent payments
C) the investor is responsible for sending out delinquent notices
D) the investor collects all delinquent payments and penalty payments

Question 9

An asset is priced efficiently when:

A) some individuals can make excess returns using publicly available information
B) no one individual can make an excessive return with public information
C) any investor can make an excessive return with information only available to him or her
D) no investor can make an excessive return with information not available to everyone

Question 10

A real estate asset provides an 11% return (the after tax cash flow is 11% of the cost of the asset).Debt can be obtained at a rate of 12% .Thus:

A) there is negative financial leverage
B) there is positive financial leverage
C) there is no financial leverage
D) financial leverage cannot be determined

Question 11

Liquidity risk:

A) is high for investments in real property
B) is related to how quickly an asset can be converted to cash without loss of volume
C) can be avoided by a bank obtaining insurance such as with the Federal Deposit Insurance Corporation
D) is low for checking accounts

Question 12

The value of mortgage-backed securities changes as a result which most important factor?

A) the maturity date for the security
B) the Dow Jones Industrial Average Index
C) volatility in the interest rates
D) the change in market interest rates

Question 13

Interest rate risk for thrifts occurs partially because they:

A) issue short-term deposits
B) issue long-term notes
C) invest in long-term variable rate mortgages
D) invest in short-term mortgages

Question 14

A call option on a mortgage is:

A) the homeowner's right to prepay the current balance prior to its maturity
B) the lender's right to foreclose in the event of default
C) the homeowner's right to take a second mortgage out on the equity in the home
D) the lender's right to resell the mortgage to another lender

Question 15

An agent is:

A) someone retained by a principal to conduct activities for the principal's benefit
B) someone retained by another to represent them in all legal matters
C) someone retained by a principal authorized to sign any legal documents
D) someone retained by another to ensure legal protocol is followed

Question 16

If the current market price of a share of stock is $47 and the intrinsic value is $3,what is the strike price?

A) $3
B) $50
C) $44
D) $47

Question 17

If an investor owned an equity position in a building and wanted to increase value using leverage he could do so by either leveraging the property or borrowing personally.However,leverage is usually applied at the property,not the personal level because:

A) the investor could make the personal loan against cash flows from the property,leaving the property available as collateral for additional loans
B) the investor cannot take personal loans to leverage an increased value based on cash flows
C) leverage can be created cheaply from personal loans; it is not added value
D) personal loans cannot be applied to cash flows; only to real property

Question 18

Positive financial leverage occurs when:

A) the asset is finance with all equity
B) the cost of borrowing exceeds the return on the investment
C) the cost of the debt is less than the return on the investment
D) there is a decline in the return on equity

Question 19

For commercial property,a larger down payment is often required; this:

A) increases the value of the put option
B) increases the value of the call option
C) reduces the value of the call option
D) reduces the value of the put option

Question 20

Agency costs include:

A) agent costs,bonding costs,and monitoring costs
B) monitoring costs,bonding costs,and structuring costs
C) bonding costs,structuring costs,and agent costs
D) monitoring costs,agent costs,and structuring costs

Question 21

Weak-form market efficiency exists:

A) when the price of the asset reflects past price behavior and public information
B) when the current price reflects all information including inside information
C) when the price of the asset completely reflects its historical price behavior
D) when the price of an asset is completely speculative (no information available)

Question 22

Pass-through Mortgage Backed Securities (MBSs)provide the investor with:

A) less prepayment risk as the originator of a specific mortgage
B) a prorated share of all monthly principal and interest payments
C) no risk from prepayments of loans
D) a weighted average of the monthly principal but not interest payments

Question 23

Monitoring costs do NOT include:

A) auditing the books
B) inspecting the property
C) paying property taxes
D) checking on the operations of the manager

Question 24

Conditions that do NOT lead to market efficiency include:

A) uniform and widespread information
B) no transaction costs
C) market restrictions
D) a large number of buyers and sellers