REE 4204 Exam 1 questions with verified
answers
Negative amortization increases the risk of default since, at some point, the
balance of the mortgage could exceed the value of the property. -
✔✔True
A homeowner incurring a residential mortgage acquires a put option which is
generally
exercised when the value of the property is less than the amount owed on the
mortgage. - ✔✔True
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. - ✔✔True
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. -
✔✔False
The instrument called hypotheca allowed the lender to take possession of
the property
only in the event of default. - ✔✔True
, Mortgage bankers came into prominence with the westward expansion
following the Civil War. - ✔✔True
The interest rate risk inherent in a fixed-rate mortgage is the decrease in value
of the mortgage with an increase in market interest rates. - ✔✔True
A bi-weekly amortization mortgage payment is the monthly payment divided
by two. - ✔✔False
Mortgage payments are structured as an ordinary annuity, meaning
that payments fall at the beginning of each period. - ✔✔False
Everything else held constant, an interest-only payment will be less than a fully
amortizing payment. - ✔✔True
The present value of an annuity increases as the discount rate increases.
- ✔✔False
A prepayment penalty increases the cost of borrowing since the amount of the
penalty is deducted from the borrower's initial proceeds. - ✔✔False
A borrower taking a fifteen year mortgage versus a thirty year mortgage will
pay significantly more interest over the life of the loan. - ✔✔False
The outstanding balance of a mortgage at a given point in time is the present
value of the remaining stream of payments discounted at the contract rate. -
✔✔True
answers
Negative amortization increases the risk of default since, at some point, the
balance of the mortgage could exceed the value of the property. -
✔✔True
A homeowner incurring a residential mortgage acquires a put option which is
generally
exercised when the value of the property is less than the amount owed on the
mortgage. - ✔✔True
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. - ✔✔True
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. -
✔✔False
The instrument called hypotheca allowed the lender to take possession of
the property
only in the event of default. - ✔✔True
, Mortgage bankers came into prominence with the westward expansion
following the Civil War. - ✔✔True
The interest rate risk inherent in a fixed-rate mortgage is the decrease in value
of the mortgage with an increase in market interest rates. - ✔✔True
A bi-weekly amortization mortgage payment is the monthly payment divided
by two. - ✔✔False
Mortgage payments are structured as an ordinary annuity, meaning
that payments fall at the beginning of each period. - ✔✔False
Everything else held constant, an interest-only payment will be less than a fully
amortizing payment. - ✔✔True
The present value of an annuity increases as the discount rate increases.
- ✔✔False
A prepayment penalty increases the cost of borrowing since the amount of the
penalty is deducted from the borrower's initial proceeds. - ✔✔False
A borrower taking a fifteen year mortgage versus a thirty year mortgage will
pay significantly more interest over the life of the loan. - ✔✔False
The outstanding balance of a mortgage at a given point in time is the present
value of the remaining stream of payments discounted at the contract rate. -
✔✔True
