Finance 4500 Exam 3 Ch 14

One basis point equals _____ percent

0.01

The average annual return for the S&P 500 since its inception in 1928 through 2014 is approximately 10%. Assume a person invested $1.00 in the S&P 500 Index every year since the end of 1928. It would have grown into $______ by the end of 2014.

36,278.66 [N]= (2014-19280= 86, [I/Y]= 10, [PV]=0, [PMT]=-1, [CPT] [FV]

You are investing your money at a compound annual return of 8%. It will take about ____ years for your money to double.

9. In your calculator, input 8 for [I/Y], 1 for [PV], 0 for [PMT], 2 for [FV], use [CPT] and [N] to find the answer or use the rule of thumb: divide interest rate into 72 (72/8=9 years)

An apartment requires an initial investment of $200,000 has a projected net income of $15,000 per year, and its projected net sales price after five years is $300,000. Considering its risk, you require a 14% annual return on this investment. What is the NPV of this project? A) $7,306.81 B) $7,766.11 C) $7,143.35 D) $7,452.09

A) $7,306.81

Suppose an investor is interested in purchasing the following income producing property at a current price of $450,000. The prospective buyer has estimated the expected cash flows over the next four years to be as follows: Year 1= $40,000, Year 2= $45,000, Year 3= $50,000, Year 4= $55,000. At the end of Year 4, the property has the sale value of $500,000. Assuming that the required rate of return is 12%, what is the NPV of the project? A) $9,889.56 B) $428,113.65 C) $459,889.56 D) $8,829.96

A) $9,889.56

X Realty Corporation is considering an investment that has the following expected cash flow. What is the project's IRR? Year 0: -$1,500,000 Year 1: $400,000 Year 2: $400,000 Year 3: $500,000 Year 4: $800,000 Year 5: $100,000 A) 14.61% B) 13.92% C) 14.15% D) 14.87%

A) 14.61%

The expected (required) IRR of an investment is composed of a risk-free rate and the required risk premium. The risk-free component is compensation for _____ of the investment. A) time B) idiosyncratic risk C) default risk

A) time

Which of the following type of real estate investments is typically considered the most risky? A) existing apartment properties B) "raw" land held for development C) existing office properties D) office properties under development

B) "raw" land help for development

What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%? A) $19,334 B) $20,352 C) $18,367 D) $21,435

B) $20,352 [N]=10 [I/Y]=5.5 [PMT]=2700 [FV]=0 [CPT] [PV]

Anderson Realty Trust is considering an apartment property investment that is expected to produce $500,000 at the end of each year for the coming three years. The investment requires a current down payment of $1,000,000. Assume the investor's required rate of return is 9%. What is the NPV of this investment? A) $281,690.05 B) $265,647.33 C) $292,888.89 D) $278,933.33

B) $265,647.33 [CF]. [CF0 =-1,000,000], [C01=500,000], [F01=3], [NPV], [I=9], [CPT] [NPV]

In the context of the real estate appraisal business, the IRR is often referred to as the "total yield", which comprised of ______ (can pick multiple) A) annual percentage rate B) appreciation yield C) current yield D) dividend yield

B) appreciation yield C) current yield

You want to buy a new sports car five years from now, and you plan to save $5,800 per year, beginning today. You will deposit your savings at the beginning of each year in an account that pays 6% interest. How much will you have in the account after making the 5th deposit, 5 years from now? A) $35,260 B) $36,063 C) $34,657 D) $32,695

C) $34,657

Equity Real Estate Trusts are REITs that invest in and operate commercial properties. From 2000 to 2006, equity REITs delivered an average annualized return of 22.9%. John invested $5,000 in equity REITs at the beginning of every year from 2000 to 2006. How much was his investment worth at the end of 2006? A) $70,635.27 B) $83,409.15 C) $86,810.74 D) $85,785.25

C) $86,810.74

An office building has a projected net income of $45,000 per year, and its projected net sales price after five years is $250,000. Considering its risk, you require a 16% annual return on this investment. How much would you be willing to pay for it? A) $254,521.25 B) $237,326.81 C) $239,295.12 D) $266,371.47

D) $266,371.47 [N]=5 [I/Y]=16 [PMT]=45,000 [FV]=250,000 [CPT] [PV]

Tom is offered a real estate investment that promises to pay $90,000 after 5 years. The annual rate of return on investments of equal risk is 15%, compounded quarterly. What price should he pay for the property? A) $44,871.23 B) $42,523.05 C) $44,745.91 D) $43,100.31

D) $43,100.31 [N]=5*4 [I/Y]=(0.15/4)*100 [PMT]=0 [FV]=90,000 [CPT] [PV]

Noah wants to quit his job and return to school for a MBA degree at the end of two years. He plans to save and deposit $2,000 per month, beginning immediately from the beginning of the first month. He will make monthly deposits in an account that pays 3% nominal interest (0.25% monthly). Under these assumptions, how much will he have accumulated at the end of two years? A) $49,405 B) $44,424 C) $45,645 D) $49,529

D) $49,529

You just inherited some money, and a broker offers to sell you an annuity that pays $5,200 at the end of each year for 20 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity today? A) $59,895 B) $50,953 C) $56,936 D) $62,142

D) $62,142 [CF], [CF0]=0, [CO1]=5,200, [F01]=20, [NPV]=5.5, [CPT] [NPV]

T or F: Ceteris paribus, a change in the discount rate affects a 15-year loan more than a 30-year loan

F

T or F: Theoretically, T-bills are securities with a maturity less than 1 year. They are typically viewed as riskless securities, therefore the return on them should be zero.

F, by investing in T-bills, you postpone some current consumptions. Therefore, the returns on T-bills should be positive

T or F: The U.S. Federal Reserve ("The Fed") periodically increase interest rates when the risk of overheated economy is perceived. Rate hikes are viewed as bad for real estate investors because the present value of future cash flows is inversely related to the magnitude of the interest rate used for discounting.

T

Calculation of the future value of a house in 5 years growing at an expected rate is called ______

compounding

Opportunity cost is the return the investor is forgoing on an alternative investment of ________ risk in order to invest in the current opportunity.

equal

Timelines are useful because they allow us to _________ the time pattern of money returns

visualize

Maxwell Realty Corporation is considering an apartment investment that is expected to produce an after-tax cash flow of $2,000 in year one, $2,025 in year two, $2,050 in year three, $2,075 in year four, and $2,100 in year five. If the company invests $9,500 today, what is the IRR of this investment? A) 2.57% B) 2.82% C) 2.65% D) 2.31%

A) 2.57% [CF0]= -9,500 [C01]=2,000 [F01]=1 [C02]=2,025 [F02]=1 [C03]=2,050 [F03]=1 [C04]=2,075 [F04]=1 [C05]=2,100 [F05]=1 [IRR] [CPT]

Which of the following types of real estate investments is generally considered the least risky? A) Office properties where the tenant pays all of the operating expenses B) "Raw" land held for future development C) Apartment properties where landlord pays all of the operating expenses

A) Office properties where the tenant pays all of the operating expenses

Future benefits are discounted because of _____. (can pick multiple) A) opportunity cost B) tax liabilities C) compounding D) risk

A) opportunity cost D) risk A: there is a cost associated with the abandonment of second-best opportunity D: the outcomes may vary from what was expected when the investment decision was made

Which of the following statements is correct? A) timelines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly B) a timeline is not meaningful unless all cash flows occur annually C) timelines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities D) timelines are not useful for visualizing complex problems prior to doing actual calculations

A) timelines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly

Suppose a U.S. Treasury bond will pay a lump sum of $8,000 ten years from now. If the current required return on 10-year treasury bonds is 6.5%, how much is the bond worth today? A) $3,928.78 B) $4,261.81 C) $4,338.40 D) $4,150.32

B) $4,261.81 [N]=10, [I/Y]=6.5, [[PMT]=0, [FV]=8000 [CPT] [PV]

Educational Realty Corporation is considering a student housing investment which is expected to produce $41,000 at the end of every year for three years. If the company invests $100,000 today, what is the IRR of this investment? A) 12.01% B) 11.11% C) 11.25% D) 10.00%

B) 11.11% [CF0]=-100,000 [C01]=41,000 [F01]=3 [IRR] [CPT]

Tom is developing an apartment building in downtown Boston. He requires an 20% going-in IRR on the expected 20-year investment. The current 20-year Treasury bond (T-bond) yield is 3%. What is the risk premium on Tom's investment? A) 6% B) 17% C) 15% D) 20%

B) 17%

Which of the following characteristics describe(s) the type of properties that are the focus of the quarterly RERC (Real Estate Research Corporation) survey? (can pick multiple) A) not fully leased B) relatively new C) values greater than $10 million D) located in non-major metropolitan areas

B) relatively new C) values greater than $10 million

Arbitrage means taking advantage of temporary differences in market prices to make a profit. Assume two real estate companies, A and B, both operate in New York area and focus on office properties. You have determined that Company A's shares have an intrinsic value of $20 per share but are trading at $22 per share. What would a rational investor (or an arbitrageur) do to take advantage of this price difference (no short-selling constraint and transaction fee)? A) buy company A's shares only B) Buy company B's shares only C) sell short company B's shares, buy the same number of company A's shares D) sell short company A's shares, buy the same number of company B's shares

D) sell short company A's shares, buy the same number of company B's shares