REE4204 TEST 1 REVIEW QUESTIONS
WITH REVISED ANSWERS
A lender gives you a $125,000 thirty-year fixed-rate mortgage at 6.75%, three
discount points, monthly payments. Suppose that, before you make any payments, you
receive a pay raise so you pay an extra $100 per month in addition to your normal
payment. Also, at the end of year five of the mortgage you have an unexpected job
transfer thus the house is sold and the mortgage is repaid. The mortgage balance at the
end of year five with the extra $100 per month payment is $110,231. What is the
effective cost of the loan for the five-year holding period?
a. 7.45%
b. 7.93%
c. 5.74%
d. 7.51%
e. none of the above - Answer-d. 7.51%
You take a fixed-rate mortgage for $120,000 at 6.25% for 30 years, monthly
,payments. At the end of the second year, you unexpectedly inherit $16,000 from your
now-favorite aunt. You decide to apply this $16,000 to the principal balance of your
loan. What is the balance of the mortgage at the end of year two
after the extra payment?
a. $103,772
b. $117,097
c. $86,095
d. $101,097
e. none of the above - Answer-d. $101,097
You take a fixed-rate mortgage for $132,000 at 6.75% for 30 years, monthly
payments. At the end of the second year, you unexpectedly inherit $18,000 from your
now-favorite uncle. You decide to apply this $18,000 to the principal balance of your
loan. How many payments are remaining after the extra lump sum payment is made?
a. 233.33
b. 126.67
c. 121.15
d. 272.00
e. none of the above - Answer-233.33
You take a fixed-rate mortgage for $130,000 at 6.75% for 30 years, monthly
payments. At the end of year two, you unexpectedly inherit $15,000 from your now-
favorite grandmother. You decide to apply this $15,000 to the principal balance of your
loan. How much interest do you save over the life of the loan by doing this assuming
that the mortgage is held to maturity?
a. $76,089
b. $96,325
c. $61,089
d. $79,637
e. none of the above - Answer-c. $61,089
A maturity mismatch occurs when:
a. over one half of all mortgage debt is held by depository institutions
b. mortgage loan interest rates are high
c. a financial institution has originated more conventional loans than government
insured loans
d. there is a large difference in the maturity of a financial institutions assets and
liabilities - Answer-d. there is a large difference in the maturity of a financial institutions
assets and
liabilities
Negative amortization refers to the fact that:
a. the balance of a loan grows larger rather than smaller
b. the amount of interest on a loan becomes larger rather than smaller
c. the reduction in the value of a property falls below the loan amount
d. none of the above - Answer-a.* the balance of a loan grows larger rather than smaller
, Assumable loans and carry backs:
a. have totally replaced FHA and VA financing
b. are examples of what is termed creative financing
c. are short-term loans with balloon payments
d. are two forms of FHA financing - Answer-b.* are examples of what is termed creative
financing
Disintermediation refers to:
a. the withdrawal of funds from financial institutions by depositors in excess of deposits
b. financial institutions withdrawing from the Federal Reserve System
c. financial institutions shifting from FHA loans to conventional loans
d. none of the above - Answer-a. the withdrawal of funds from financial institutions by
depositors in excess of deposits
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. - Answer-a.* lend credit to create assets for
itself
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 - Answer-b.* is related to how quickly an asset can be
converted to cash without loss of volume
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 - Answer-a.* issue short-term deposits
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 - Answer-b.* without a change in expected returns
An asset is priced efficiently when:
a. some individuals can make excess returns using publicly available information
WITH REVISED ANSWERS
A lender gives you a $125,000 thirty-year fixed-rate mortgage at 6.75%, three
discount points, monthly payments. Suppose that, before you make any payments, you
receive a pay raise so you pay an extra $100 per month in addition to your normal
payment. Also, at the end of year five of the mortgage you have an unexpected job
transfer thus the house is sold and the mortgage is repaid. The mortgage balance at the
end of year five with the extra $100 per month payment is $110,231. What is the
effective cost of the loan for the five-year holding period?
a. 7.45%
b. 7.93%
c. 5.74%
d. 7.51%
e. none of the above - Answer-d. 7.51%
You take a fixed-rate mortgage for $120,000 at 6.25% for 30 years, monthly
,payments. At the end of the second year, you unexpectedly inherit $16,000 from your
now-favorite aunt. You decide to apply this $16,000 to the principal balance of your
loan. What is the balance of the mortgage at the end of year two
after the extra payment?
a. $103,772
b. $117,097
c. $86,095
d. $101,097
e. none of the above - Answer-d. $101,097
You take a fixed-rate mortgage for $132,000 at 6.75% for 30 years, monthly
payments. At the end of the second year, you unexpectedly inherit $18,000 from your
now-favorite uncle. You decide to apply this $18,000 to the principal balance of your
loan. How many payments are remaining after the extra lump sum payment is made?
a. 233.33
b. 126.67
c. 121.15
d. 272.00
e. none of the above - Answer-233.33
You take a fixed-rate mortgage for $130,000 at 6.75% for 30 years, monthly
payments. At the end of year two, you unexpectedly inherit $15,000 from your now-
favorite grandmother. You decide to apply this $15,000 to the principal balance of your
loan. How much interest do you save over the life of the loan by doing this assuming
that the mortgage is held to maturity?
a. $76,089
b. $96,325
c. $61,089
d. $79,637
e. none of the above - Answer-c. $61,089
A maturity mismatch occurs when:
a. over one half of all mortgage debt is held by depository institutions
b. mortgage loan interest rates are high
c. a financial institution has originated more conventional loans than government
insured loans
d. there is a large difference in the maturity of a financial institutions assets and
liabilities - Answer-d. there is a large difference in the maturity of a financial institutions
assets and
liabilities
Negative amortization refers to the fact that:
a. the balance of a loan grows larger rather than smaller
b. the amount of interest on a loan becomes larger rather than smaller
c. the reduction in the value of a property falls below the loan amount
d. none of the above - Answer-a.* the balance of a loan grows larger rather than smaller
, Assumable loans and carry backs:
a. have totally replaced FHA and VA financing
b. are examples of what is termed creative financing
c. are short-term loans with balloon payments
d. are two forms of FHA financing - Answer-b.* are examples of what is termed creative
financing
Disintermediation refers to:
a. the withdrawal of funds from financial institutions by depositors in excess of deposits
b. financial institutions withdrawing from the Federal Reserve System
c. financial institutions shifting from FHA loans to conventional loans
d. none of the above - Answer-a. the withdrawal of funds from financial institutions by
depositors in excess of deposits
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. - Answer-a.* lend credit to create assets for
itself
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 - Answer-b.* is related to how quickly an asset can be
converted to cash without loss of volume
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 - Answer-a.* issue short-term deposits
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 - Answer-b.* without a change in expected returns
An asset is priced efficiently when:
a. some individuals can make excess returns using publicly available information
