REAL 4000 Test 2 Dietz Exam Q’s and A’s
(Chapters 7, 9, 10, 14, 15)
1. Magnitude
2. Timing
3. Riskiness
of expected cash flows - -Value of a property or mortgage thus depends on:
- - "Time Zero" - -TVM timelines always starts with
- 30 years - -Mortgage (debt) timelines normally
- 3-7 years - -Most commercial property ownership
- PV - -Amount at time "zero"
- FV - -A single cash flow at any future time point
- PMT - -A repeating amount of cash inflow or outflow, flow normally begins
at end of first period, sometimes at time zero
- N - -This is the measure of time and the number of computations
(compounds)
- I/Y - -Interest Rate, required return, rate of return, opportunity cost,
discount rate, IRR, etc. This is some sort of rate (%) of return (yield) based on
risk
- Ordinary annuity - -a fixed amount of money paid or received at the end of
every period. Often another name for fixed PMT.
- Lump sum payment - -Any future cash inflow or outflow occurring only
once (often another name for FV).
- FV of Lump Sum Formula - -(1 + r)^n
- future value of an annuity formula - -(1 + r)^n - 1 / r
- Present value of a lump sum - -1 / (1 + r)^n
- Present value of annuity - -1-[1/(1 + r)^n] / r
- 1. find the PVs of six different cash flows and sum the results
, 2. PV of a five-year $10,000 annuity + PV of a lump sum of $100,000 in year
5
3. Solve as a combined PV problem - -ways to solve for time "zero"
- 1. find the PVs of six different cash flows and sum the results
2. Solve using the variable cash flow capacity of your calculator (CF and NPV
buttons)
3. Use a spreadsheet - -when cashflow is uneven:
- higher rate of return - -the lower the price of a property =
- the lower the rate of return - -the higher the price of a property =
- directly - -risk and return are ____________ related
- land speculation
hospitality
restaurants - -what property types are considered high risk?
- AAA rated mortgage bonds
Net leased to AAA tenant - -what property types are considered low risk?
- apartments
offices - -what property types are considered medium risk?
- 7-8% or less (investment grade of 3%) - -high quality (safe real estate
investments)
- 30% of more - -development quality
- NPV - -is a measure of change in an investors wealth
- good investment - -positive NPV
- indifferent investment - -zero NPV
- bad investment - -negative NPV
- 1. The amount and frequency of payments
2. The loan balance at any given time
The first two allow us to calculate the next three:
3. The lender's yield (%)
4. The borrower's effective borrowing cost (%)
5. The present value of debt payments
(Chapters 7, 9, 10, 14, 15)
1. Magnitude
2. Timing
3. Riskiness
of expected cash flows - -Value of a property or mortgage thus depends on:
- - "Time Zero" - -TVM timelines always starts with
- 30 years - -Mortgage (debt) timelines normally
- 3-7 years - -Most commercial property ownership
- PV - -Amount at time "zero"
- FV - -A single cash flow at any future time point
- PMT - -A repeating amount of cash inflow or outflow, flow normally begins
at end of first period, sometimes at time zero
- N - -This is the measure of time and the number of computations
(compounds)
- I/Y - -Interest Rate, required return, rate of return, opportunity cost,
discount rate, IRR, etc. This is some sort of rate (%) of return (yield) based on
risk
- Ordinary annuity - -a fixed amount of money paid or received at the end of
every period. Often another name for fixed PMT.
- Lump sum payment - -Any future cash inflow or outflow occurring only
once (often another name for FV).
- FV of Lump Sum Formula - -(1 + r)^n
- future value of an annuity formula - -(1 + r)^n - 1 / r
- Present value of a lump sum - -1 / (1 + r)^n
- Present value of annuity - -1-[1/(1 + r)^n] / r
- 1. find the PVs of six different cash flows and sum the results
, 2. PV of a five-year $10,000 annuity + PV of a lump sum of $100,000 in year
5
3. Solve as a combined PV problem - -ways to solve for time "zero"
- 1. find the PVs of six different cash flows and sum the results
2. Solve using the variable cash flow capacity of your calculator (CF and NPV
buttons)
3. Use a spreadsheet - -when cashflow is uneven:
- higher rate of return - -the lower the price of a property =
- the lower the rate of return - -the higher the price of a property =
- directly - -risk and return are ____________ related
- land speculation
hospitality
restaurants - -what property types are considered high risk?
- AAA rated mortgage bonds
Net leased to AAA tenant - -what property types are considered low risk?
- apartments
offices - -what property types are considered medium risk?
- 7-8% or less (investment grade of 3%) - -high quality (safe real estate
investments)
- 30% of more - -development quality
- NPV - -is a measure of change in an investors wealth
- good investment - -positive NPV
- indifferent investment - -zero NPV
- bad investment - -negative NPV
- 1. The amount and frequency of payments
2. The loan balance at any given time
The first two allow us to calculate the next three:
3. The lender's yield (%)
4. The borrower's effective borrowing cost (%)
5. The present value of debt payments
