REE4204 FINAL EXAM QUESTIONS WITH VERIFIED
ANSWERS
8% - ✔✔Under the expectations theory, observed rates on current one-year
and two-year bonds of 4% and 6%, respectively, indicate that the one-year bond
rate one year from now will be between 4% and 6%.
True - ✔✔Under the expectations theory, an upwards sloping yield curve
means that investors expect market rates to rise in the future.
False - ✔✔The market segmentation theory by its nature dictates that short
term rates must always be less than long term rates.
True - ✔✔Default risk is the risk that a bond issuer will be unable to repay the
principal and interest on the debt.
True - ✔✔The yield observed on a riskless bond in a non-inflationary
environment would be the real rate of interest.
True - ✔✔A primary market transaction always involves the original issuer of
the security.
False - ✔✔The term "toxic mortgage debt" in the 2000s referred to mortgages
on properties
contaminated by hazardous waste.
,True - ✔✔In using the discounted cash flow model, the valuation of an asset
depends on the expected amount, timing, and risk associated with the project's
cash flows.
False - ✔✔Negative financial leverage occurs when the cost of debt is greater
than the equity yield on the investment.
True - ✔✔The Federal National Mortgage Association was originally
established in 1938 for the purpose of buying FHA mortgages.
False - ✔✔The falling house prices in the mid-2000s generated greater equity
positions for those buyers who had recently purchased a home.
True - ✔✔Influence on current U.S. law related to real estate can be traced all
the way back to the Roman empire.
False - ✔✔The adjustable-rate mortgage allows the borrower to shift all or
some of the interest rate risk to the lender.
True - ✔✔Negative amortization increases the risk of default since, at some
point, the balance of the mortgage could exceed the value of the property.
Put - ✔✔A homeowner incurring a residential mortgage acquires a ______
option which is generally exercised when the value of the property is less than the
amount owed on the mortgage.
, False - ✔✔A major factor of the collapse of the U.S. banking system in the
1930s was the high number of long-term mortgages outstanding.
False - ✔✔The maturity mismatch problem faced by many financial institutions
resulted from holding liabilities with much longer lives than their assets.
False - ✔✔It is impossible for the cash flow on a project to be positive if the
taxable income is negative.
False - ✔✔Removing the rate ceilings on deposits in thrifts in the early 1980s
eliminated the maturity mismatch problem that these institutions had previously
suffered.
false - ✔✔Under the semi-strong form of market efficiency an investor could
earn excess returns using private or inside information.
True - ✔✔Disintermediation is the process of funds flowing out of financial
institutions.
True - ✔✔Favorable financial leverage occurs when the cost of debt is less than
the return on the investment.
False - ✔✔Agents never have incentives to pursue behavior which is
detrimental to their principals.
False - ✔✔When a residential mortgage is created the mortgagee acquires a
call option which allows the debt to be retired at any time prior to maturity.
ANSWERS
8% - ✔✔Under the expectations theory, observed rates on current one-year
and two-year bonds of 4% and 6%, respectively, indicate that the one-year bond
rate one year from now will be between 4% and 6%.
True - ✔✔Under the expectations theory, an upwards sloping yield curve
means that investors expect market rates to rise in the future.
False - ✔✔The market segmentation theory by its nature dictates that short
term rates must always be less than long term rates.
True - ✔✔Default risk is the risk that a bond issuer will be unable to repay the
principal and interest on the debt.
True - ✔✔The yield observed on a riskless bond in a non-inflationary
environment would be the real rate of interest.
True - ✔✔A primary market transaction always involves the original issuer of
the security.
False - ✔✔The term "toxic mortgage debt" in the 2000s referred to mortgages
on properties
contaminated by hazardous waste.
,True - ✔✔In using the discounted cash flow model, the valuation of an asset
depends on the expected amount, timing, and risk associated with the project's
cash flows.
False - ✔✔Negative financial leverage occurs when the cost of debt is greater
than the equity yield on the investment.
True - ✔✔The Federal National Mortgage Association was originally
established in 1938 for the purpose of buying FHA mortgages.
False - ✔✔The falling house prices in the mid-2000s generated greater equity
positions for those buyers who had recently purchased a home.
True - ✔✔Influence on current U.S. law related to real estate can be traced all
the way back to the Roman empire.
False - ✔✔The adjustable-rate mortgage allows the borrower to shift all or
some of the interest rate risk to the lender.
True - ✔✔Negative amortization increases the risk of default since, at some
point, the balance of the mortgage could exceed the value of the property.
Put - ✔✔A homeowner incurring a residential mortgage acquires a ______
option which is generally exercised when the value of the property is less than the
amount owed on the mortgage.
, False - ✔✔A major factor of the collapse of the U.S. banking system in the
1930s was the high number of long-term mortgages outstanding.
False - ✔✔The maturity mismatch problem faced by many financial institutions
resulted from holding liabilities with much longer lives than their assets.
False - ✔✔It is impossible for the cash flow on a project to be positive if the
taxable income is negative.
False - ✔✔Removing the rate ceilings on deposits in thrifts in the early 1980s
eliminated the maturity mismatch problem that these institutions had previously
suffered.
false - ✔✔Under the semi-strong form of market efficiency an investor could
earn excess returns using private or inside information.
True - ✔✔Disintermediation is the process of funds flowing out of financial
institutions.
True - ✔✔Favorable financial leverage occurs when the cost of debt is less than
the return on the investment.
False - ✔✔Agents never have incentives to pursue behavior which is
detrimental to their principals.
False - ✔✔When a residential mortgage is created the mortgagee acquires a
call option which allows the debt to be retired at any time prior to maturity.
