REE 4204 SIRMANS TEST QUESTIONS
WITH REVISED ANSWERS
1990's - Answer--dominance of government sponsered enterprises
-baby boomers increase demand for housing
-low mortgage intrest rates
2000's - Answer--housing market craze
-housing prices were raised over 80%
-sharp drop of market priced due to unsold homes
-several wall street firms demolished and fannie mae and freddie mac were taken over
by gov
-rebound in housing prices now we have historically low interest rates
Amortization of a mortgage - Answer--as time goes up interest payments get smaller
due to the decreasing principal amount borrowed, and repayment of the principal
portion increases
outstanding balance of the mortgage - Answer--the outstanding balance is the present
value of the remaining stream of payments, discounted at the contract rate
factors affecting interest rate - Answer--increase in loan amount
-loan term
-lock in period
-down payment
-discount points
-credit score
effective cost of the mortgage - Answer--borrowers actual percentage cost of borrowing
-affected by loan fees charged by the lender
discount points - Answer-lower the contract rate which lowers the payment rate, interest
rate goes down, pays off quicker
annual percentage rate - Answer-effective borrowing cost of a loan, assuming it is held
to maturity
bi-weekly mortgage - Answer-reduces the payment period for the mortgage, holding the
amount and the interest rate constant
prepayment protection mortgage - Answer--borrower give uo the right to prepay the
mortgage without penalty in exchange for a lower interest rate
negative discount points - Answer--cash payment from lender to the borrower-which will
raise the contract rate
-contract inrest rate would be above par
fixed mortgage and interest rate risk - Answer--interest rate risk-risk of loss due to
, changes in the market interest rates
-market values of fixed rate mortgages change inversely with market rate changes
Issues in real estate - Answer-1. valuation of property-market value vs the book value,
appraised value, depends on expected amount, timing, and risk associated with the
asset cash flows
2. NOI-accounting profits vs after tax cash flows
-added cash flows from minimizing taxes allow for greater accumulation of wealth since
cash flows can be reinvested in other corporate investments
3. timing-sooner the cash flow is received the greater its present value
The role of risk in valuation - Answer-1.higher risk= higher return
2.risk-free return for postponed consumption
3. risk premium is based on risk exposure
4. the discount rate associated with the equity portion of real estate investment should
be higher than the one associated with the debt of the project in order to make money
Financial leverage - Answer--the concept of using debt to finance a project
-primary sources of capital are debt and equity
-borrowing rate should always be less than the rate of return
-modigliani and miller-in a perfect market capital structure is irrelevant
Options in real estate - Answer-1.prepayment or call option-gives the homeowner the
right to prepay the current balance on a mortgage prior to maturity(common in
commercial)
-typically happens when rates decrease
2. put option- gives owner the right to put property in place of the debt or default on the
debt
-foreclosure option
3. options on house prices-CME offers futures and options on house price indices for
major metropolitan areas
4. explicit option-the right to purchase property at a specified price with a specified time
-often in relation to the purchase of raw or undeveloped land
financial intermediation - Answer--intermediary stands between the supplier and the
user of credit
-performs economic functions by assuming
--1 liquidity risk
--2credit evaluation on borrower and property and risk management
--3 intrest rate risk-exposure through fixed rate mortgages and prepayments
portfolio theory - Answer--when assets are combined to form a portfolio, the expected
return on the portfolio will be equal to the weighted average based on the relative value
of each asset in the portfolio of the expected returns on the individual assets
WITH REVISED ANSWERS
1990's - Answer--dominance of government sponsered enterprises
-baby boomers increase demand for housing
-low mortgage intrest rates
2000's - Answer--housing market craze
-housing prices were raised over 80%
-sharp drop of market priced due to unsold homes
-several wall street firms demolished and fannie mae and freddie mac were taken over
by gov
-rebound in housing prices now we have historically low interest rates
Amortization of a mortgage - Answer--as time goes up interest payments get smaller
due to the decreasing principal amount borrowed, and repayment of the principal
portion increases
outstanding balance of the mortgage - Answer--the outstanding balance is the present
value of the remaining stream of payments, discounted at the contract rate
factors affecting interest rate - Answer--increase in loan amount
-loan term
-lock in period
-down payment
-discount points
-credit score
effective cost of the mortgage - Answer--borrowers actual percentage cost of borrowing
-affected by loan fees charged by the lender
discount points - Answer-lower the contract rate which lowers the payment rate, interest
rate goes down, pays off quicker
annual percentage rate - Answer-effective borrowing cost of a loan, assuming it is held
to maturity
bi-weekly mortgage - Answer-reduces the payment period for the mortgage, holding the
amount and the interest rate constant
prepayment protection mortgage - Answer--borrower give uo the right to prepay the
mortgage without penalty in exchange for a lower interest rate
negative discount points - Answer--cash payment from lender to the borrower-which will
raise the contract rate
-contract inrest rate would be above par
fixed mortgage and interest rate risk - Answer--interest rate risk-risk of loss due to
, changes in the market interest rates
-market values of fixed rate mortgages change inversely with market rate changes
Issues in real estate - Answer-1. valuation of property-market value vs the book value,
appraised value, depends on expected amount, timing, and risk associated with the
asset cash flows
2. NOI-accounting profits vs after tax cash flows
-added cash flows from minimizing taxes allow for greater accumulation of wealth since
cash flows can be reinvested in other corporate investments
3. timing-sooner the cash flow is received the greater its present value
The role of risk in valuation - Answer-1.higher risk= higher return
2.risk-free return for postponed consumption
3. risk premium is based on risk exposure
4. the discount rate associated with the equity portion of real estate investment should
be higher than the one associated with the debt of the project in order to make money
Financial leverage - Answer--the concept of using debt to finance a project
-primary sources of capital are debt and equity
-borrowing rate should always be less than the rate of return
-modigliani and miller-in a perfect market capital structure is irrelevant
Options in real estate - Answer-1.prepayment or call option-gives the homeowner the
right to prepay the current balance on a mortgage prior to maturity(common in
commercial)
-typically happens when rates decrease
2. put option- gives owner the right to put property in place of the debt or default on the
debt
-foreclosure option
3. options on house prices-CME offers futures and options on house price indices for
major metropolitan areas
4. explicit option-the right to purchase property at a specified price with a specified time
-often in relation to the purchase of raw or undeveloped land
financial intermediation - Answer--intermediary stands between the supplier and the
user of credit
-performs economic functions by assuming
--1 liquidity risk
--2credit evaluation on borrower and property and risk management
--3 intrest rate risk-exposure through fixed rate mortgages and prepayments
portfolio theory - Answer--when assets are combined to form a portfolio, the expected
return on the portfolio will be equal to the weighted average based on the relative value
of each asset in the portfolio of the expected returns on the individual assets
