Real Estate Finance Exam #1 Questions And Answers 100% Correct!!

Real Estate Finance - ANSWERSThe study of the institutions, markets and instruments used to transfer money and credit for the purpose of developing or acquiring real property. Real Property - ANSWERSThe rights, power, and privileges associated with the use of real estate. Real Estate - ANSWERSLand and all fixed immovable improvements on it. Financial Instruments - ANSWERSAre used to transfer money and credit for the purpose of developing and acquiring real property .Environment of Real Estate Finance - ANSWERSThe institutions that create and purchase those instruments and the markets in which they are traded constitute the? Cost, Risk, and Yield - ANSWERSThe three unifying factors which drive all rational financial decisions. Borrowing Costs - ANSWERSA critical factor in determining the supply side of the real estate supply and demand equation. Passive Investors - ANSWERSInvestor type which puts money at risk and has no control. Active Investors - ANSWERSInvestor type which makes decisions that influence an investments return. Debt Position - ANSWERSThe position in which an investor lends money and expects to recover principle and interest. Equity Investors - ANSWERSInvestors who acquire an actual ownership interest in real estate assets. Financial Intermediaries - ANSWERSFinancial Institutions who facilitate the flow of funds from the surplus income (savers) units to the deficit Income (borrowers) units. Commercial Banks - ANSWERSInstitutions accepting demand (checking) and time (CDs & Savings) deposits. Thrift Institutions - ANSWERSSavings and Loan institutions; mutual savings banks; credit unions (the main difference in these are the types of ownership) Investment Companies - ANSWERSThese pool the funds of savers and invest the funds in a portfolio of assets. Insurance Companies - ANSWERSThese receive periodic, lump sum payments from individuals or organizations in exchange for a promise to make future payments if certain events occur. Pension Funds - ANSWERSThese pool the contributions of employees and invest the funds similarly to insurance companies. 1970 - ANSWERSAlternative mortgage instruments were introduced after what year? Economic Recovery Tax Act of 1981 - ANSWERSThe act congress passed in the 80s that majorly increased tax incentives for investing in real estate. Commercial Mortgage Backed Securities - ANSWERSThe method of conduit financing wildly popular in the 90s. Primary Mortgage Market - ANSWERSThe market where loans are originated. Primary Market - ANSWERSWho holds the risk if the mortgage cannot be sold in the secondary market? Secondary Market - ANSWERSThe market where existing mortgages are bought and sold. Liquid - ANSWERSA large or active secondary market makes securities more? Money Markets and Capital Markets - ANSWERSWhat are the two categories of financial markets? Money Markets - ANSWERSType of financial market which deals with short term securities (usually one year or less to maturity). Capital Markets - ANSWERSType of financial market which deals with long term securities (usually one year or less to maturity). Capital Markets - ANSWERSMost real estate financing occurs in which type of financial market? Asset Valuation - ANSWERSThis depends on the amount, timing, and risk associated with the asset's cash flows. Discounted Cash Flows (Basic Valuation Equation) - ANSWERSThis method of asset valuation applies to any asset that is capable of providing cash flows to the owner. NOI - ANSWERSCash flows before capital expenditures, debt service and taxes. Before Tax Cash Flow - ANSWERSCash flows after capital expenditures and debt service, but before taxes. After Tax Cash Flows - ANSWERSCash flows after capital expenditures, debt service and taxes. Sooner - ANSWERSThe SOONER or LATER a cash flow is received, all else equal, the greater the PV. Risk of Cash Flows - ANSWERSWhen a probability exists that the actual cash flow may be different than the expected. Risk - ANSWERSHelps to determine the appropriate discount rate to use in the discounted cash flows equation. Higher - ANSWERSShould the discount rate associated with the equity portion of a project be higher or lower than the debt of the project? Financial Leverage - ANSWERSThe concept of using debt to finance an investment project. Unfavorable - ANSWERSLeverage is FAVORABLE or UNFAVORABLE when when borrowing costs more than the rate of return on an asset. Favorable - ANSWERSLeverage is FAVORABLE or UNFAVORABLE when when borrowing costs less than the rate of return on an asset. Spread - ANSWERSThe difference between the rate of return on an asset and the cost of borrowing. Modigliani Miller - ANSWERSThe theory that in perfect markets capital structure is irrelevant. Optimal Leverage - ANSWERSThe point at which additional debt financing will not increase the value of the asset. Yes - ANSWERSDoes leverage increase irr in real estate? Call Option - ANSWERSThis gives the borrower the right to prepay the note at any time prior to maturity (in terms of options). Put Option - ANSWERSThis gives the lender th