RE Fiance Chapter 1 Cummulative Quiz

A mortgage lender's risk of loss relates to: the likelihood that the borrower will default on the loan the probability that interest rates will decrease during the loan term the possibility that the proceeds from a foreclosure sale of the property wouldn't cover the loan balance None of the above

Correct Answer: C Explanation: The risk of loss associated with a mortgage loan relates to whether the property securing the loan could be sold for enough to pay off the amount owed if foreclosure became necessary.

Which of the following is NOT true of market interest rates? High market interest rates encourage refinancing High market interest rates dampen the real estate market Low market interest rates can stimulate home sales Low market interest rates encourage refinancing

Correct Answer: A Explanation: It's low market interest rates (not high rates) that encourage refinancing. When interest rates drop, home owners refinance to get a new loan at a lower rate than their old loan.

A certificate of indebtedness issued by a governmental body or a corporation is a: bond mutual fund stock certificate of deposit

Correct Answer: A Explanation: A bond is a certificate of indebtedness issued by a governmental body or a business entity. With most bonds, the issuer makes periodic interest payments to the bondholder, and repays the amount of the principal to the bondholder on the maturity date.

Which of the following statements about securities is true? Securities give the holder a property interest or a right to payment The holder of a security has managerial control over the underlying enterprise Savings accounts are securities Securities are not easily bought or sold

Correct Answer: A Explanation: A security is an instrument that gives the holder a property interest or a right to payment, but no managerial control over the underlying enterprise.

One way an investor can minimize the likelihood of suffering serious losses on her investments is to: maintain a diversified portfolio focus on investments with a high rate of return invest in only one type of asset All of the above

Correct Answer: A Explanation: Diversification (spreading money over several investments of different types) is one way to reduce the risk of significant financial losses. With a diversified portfolio, losses on some investments may be offset by gains on others.

Mortgage lenders screen loan applicants to evaluate the: risk of default risk of loss interest rate risk All of the above

Correct Answer: A Explanation: Through the loan underwriting process, a lender screens loan applicants to determine how likely they are to default on the proposed loan instead of repaying it as agreed.

To protect the yields they expect from their loans, mortgage lenders sometimes charge a penalty for: prepayment foreclosure increased interest rates None of the above

Correct Answer: A Explanation: When a loan is prepaid, the lender doesn't collect all of the interest income it expected from the loan, so its yield on the investment is reduced. Some lenders charge a prepayment penalty to discourage prepayment and/or compensate for the reduced yield in the event of prepayment.

A lender receives a return on a mortgage loan in the form of: interest appreciation a discount rate dividends

Correct Answer: A Explanation: With a mortgage loan (or almost any type of loan), the lender's primary return on the investment takes the form of interest that the borrower pays on the principal.

An investor who is interested in the amount of money an investment will produce is primarily concerned about the investment's: safety yield liquidity diversity

Correct Answer: B Explanation: The yield on an investment is the investor's rate of return.

An investor invests money in expectation of a return on the investment. Depending on the type of investment, the return may be any of the following, except: rental income interest depreciation appreciation

Correct Answer: C Explanation: Debt investments provide a return in the form of interest. (The principal is the amount invested, not a return on the investment.) Ownership investments may provide a return in the form of appreciation, dividends, or (if the asset is income-producing) rental income.

Jenny has saved up $4,000 over the past year, and she'd like to invest the money. She's uncertain about the stability of her job, however, and she wants quick access to her money in the event that she's laid off. Jenny is primarily concerned about: safety rate of return liquidity appreciation

Correct Answer: C Explanation: Liquid investments are investments that the investor can easily convert into cash, if that becomes necessary or desirable.

Stocks and bonds are traded in specialized markets that are regulated by the: Federal Deposit Insurance Corporation Equal Credit Opportunity Commission Securities and Exchange Commission Federal Reserve System

Correct Answer: C Explanation: The Securities and Exchange Commission (SEC) is a federal agency that regulates the sale and purchase of securities (stocks and bonds) in the securities markets.

Which of these types of investments is the most illiquid? Bonds Mutual funds Real estate Stocks

Correct Answer: C Explanation: The rate at which real estate can be bought or sold is slow compared to other types of investments. Real estate is considered an illiquid investment.

Gina bought her house 5 years ago for $250,000 and has made no improvements. She's decided to move to the country, so she puts the house up for sale. Todd buys it for $375,000. Gina's profit on the sale is the result of: liquidity diversification appreciation principal

Correct Answer: C Explanation: Appreciation is an increase in the value of an asset. When an asset is sold at a profit, the difference between the sales price and the original purchase price is (in most cases) largely the result of the asset's appreciation during the period of ownership.

The original principal amount of a mortgage loan is the: lender's yield lender's return on the investment amount of the lender's investment appreciation of the asset

Correct Answer: C Explanation: The original loan amount (the principal) is the amount of the lender's investment.

Someone who buys an asset or a property interest in an asset is making a/an: security investment debt investment diversified investment ownership investment

Correct Answer: D Explanation: An ownership investment is one in which the investor acquires an interest in an asset.

Mortgage loans are pooled together and sold on the secondary market as: package loans mutual funds bond groups mortgage-backed securities

Correct Answer: D Explanation: Mortgage-backed securities are based on pools of mortgage loans and sold to investors on the secondary market.

The face amount of a bond is the: interest rate paid on the bond total interest paid over the bond's term bond's value when pooled with other bonds value of the bond at maturity

Correct Answer: D Explanation: The face amount of a bond is the amount paid to the bondholder at maturity. This is usually the same as the amount the bondholder originally paid for the bond.

Generally, the longer the loan term: the lower the risk of loss the higher the risk of loss the lower the interest rate risk the higher the interest rate risk

Correct Answer: D Explanation: The risk that interest rates may change dramatically during the loan term increases with the length of the term. If rates rise sooner or much more than expected, the lender may be stuck with an investment that produces much less income than could be earned by reinvesting the money at current interest rates.

Which of the following are debt investments? Securities Stocks Real estate Bonds

Correct Answer: D Explanation: Bonds are debt investments. Bondholders essentially loan the face amount of the bonds to the issuing entity and receive interest in exchange for the loan. (Securities include stocks, which are ownership investments, as well as bonds.)