REE 4204 Exam 1
A downward sloping yield curve shows that, at this point in time, long-term rates are higher than short-term rates. T/F
False
A yield curve shows the yields on bonds over time. True False No answer text provided. No answer text provided.
False
Agents never have incentives to pursue behavior which is detrimental to their principals. T/F
False
Commercial banks are overseen by the Office of Thrift Supervision. T/F
False
For most investments, cash flow and net profit can be used interchangeably in asset valuation. T/F
False
It is impossible for the cash flow on a project to be positive if the taxable income is negative. T/F
False
Negative financial leverage occurs when the cost of debt is greater than the equity yield on the investment. T/F
False
Since the nominal interest rate can be observed in the market, a precise measure of future inflation can be determined. T/F
False
The adjustable-rate mortgage allows the borrower to shift all or some of the interest rate risk to the lender. T/F
False
The benefit to the investor of the call provision in a callable bond increases as the market interest rate falls further below the rate offered on the bond. T/F
False
The market segmentation theory by its nature dictates that short-term rates must always be less than long-term rates. T/F
False
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. T/F
True
A primary market transaction always involves the original issuer of the security T/F
True
According to the liquidity premium theory, investors are willing to pay a price premium for securities with shorter maturities. T/F
True
Default risk is the risk that a bond issuer will be unable to repay the principal and interest on the debt. T/F
True
In general inflation is a monetary phenomenon resulting from an increase in the money supply as opposed to resulting from an increase in general price levels. T/F
True
In using the discounted cash flow model, the valuation of an asset depends on the expected amount, timing, and risk associated with the project's cash flows. T/F
True
Influence on current U.S. law related to real estate can be traced all the way back to the Roman empire. T/F
True
Real estate investment trusts (REITs) specialize in investing in real property and mortgages on real property. T/F
True
Since finance is concerned with the valuation of assets, it must explicitly consider the time value of money. T/F
True
The instrument called hypotheca allowed the lender to take possession of the property only in the event of default. T/F
True
The price of a bond, besides being determined by the market-required rate, also moves inversely to this rate. T/F
True
The yield observed on a riskless bond in a non-inflationary environment would be the real rate of interest. T/F
True
A bi-weekly amortization mortgage payment is the monthly payment divided by two. T/F
false
A borrower taking a fifteen year mortgage versus a thirty year mortgage will pay significantly more interest over the life of the loan. T/F
false
A major factor of the collapse of the U.S. banking system in the 1930s was the high number of long-term mortgages outstanding. T/F
false
A mortgage lender is always allowed to collect interest in advance. T/F
false
A prepayment penalty increases the cost of borrowing since the amount of the penalty is deducted from the borrower's initial proceeds. T/F
false
Financing costs such as discount points increase the effective cost of borrowing by raising the monthly debt service payments. T/F
false
In order to derive the mortgage constant factor one must know the amount of funds to be borrowed. T/F
false
In today's mortgage market, due to the short-term nature of mortgages, most real estate financing takes place in the money markets. T/F
false
Mortgage payments are structured as an ordinary annuity, meaning that payments fall at the beginning of each period. T/F
false
Removing the rate ceilings on deposits in thrifts in the early 1980s eliminated the maturity mismatch problem that these institutions had previously suffered. T/F
false
The APR reported by the lender to the borrower makes no assumption regarding the holding period of the mortgage. T/F
false
The falling house prices in the mid-2000s generated greater equity positions for those buyers who had recently purchased a home. T/F
false
The market segmentation theory suggests that there is more than one market for the same security. T/F
false
The maturity mismatch problem faced by many financial institutions resulted from holding liabilities with much longer lives than their assets. T/F
false
The mortgage constant factor is the reciprocal of the future value annuity factor. T/F
false
The present value of an annuity increases as the discount rate increases. T/F
false
The secondary mortgage market is the market where second (junior) mortgages are created. T/F
false
The term "toxic mortgage debt" in the 2000s referred to mortgages on properties contaminated by hazardous waste. T/F
false
Under the expectations theory, observed rates on current one-year and two-year bonds of 4% and 6%, respectively, indicate that the one-year bond rate one-year from now will be between 4% and 6%. T/F
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. T/F
false
A prepayment penalty, when stated as a percentage, is a percentage of the outstanding balance at the time of prepayment. T/F
true
An incentive for the borrower to make extra payments on his/her mortgage is that the lender cannot charge interest on any principal amounts repaid. T/F
true
Disintermediation is the process of funds flowing out of financial institutions. T/F
true
Everything else held constant, an interest-only payment will be less than a fully amortizing payment. T/F
true
Favorable financial leverage occurs when the cost of debt is less than the return on the investment. T/F
true
For a fully amortized mortgage that has a life of n payments, the outstanding balance at a point in time m is the present value of the n minus m number of payments. T/F
true
For a mortgage with no prepayment penalty and no financing costs, early repayment does not affect the effective cost of the loan. T/F
true
In a normal economic period with an upward sloping yield curve, the interest rate on a fifteen year mortgage will be less than the interest rate on a thirty year mortgage. T/F
true
Mortgage bankers came into prominence with the westward expansion following the Civil War. T/F
true
Negative amortization increases the risk of default since, at some point, the balance of the mortgage could exceed the value of the property. T/F
true
Since a fixed-rate mortgage establishes an interest rate for a long period of time, this interest rate reflects the lender's expectations of inflation over this time period. T/F
true
The Federal National Mortgage Association was originally established in 1938 for the purpose of buying FHA mortgages. T/F
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. T/F
true
The mortgage constant calculates the payment per dollar borrowed at a given interest rate and term. T/F
true
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. T/F
true
Under the expectations theory, an upward sloping yield curve means that investors expect market rates to rise in the future. T/F
true
Under the semi-strong form of market efficiency an investor could earn excess returns using private or inside information. T/F
true
