Real Estate Law Part 6 (formulas)
Which of the following type of real estate investment is typically considered the most risky?
"Raw" land held for development
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 S&P 500 Index in the end of 1928. It would have grown to ________ in the end of 2014 (Round your answer to the nearest cent). What is the (p), (r), (n)
$1 10% 86 years
The most common adjustment interval on an adjustable rate mortgage (ARM) once the interest rate begins to change has been
1 yr
Assume that a piece of land is currently valued at $50,000. If this piece of land is expected to appreciate at an annual rate of 5% per year for the next 20 years, how much will the land be worth at the end of 20 years? What is the (n) in this question?
20 years (number of periods/ time)
Assume that a piece of land is currently valued at $50,000. If this piece of land is expected to appreciate at an annual rate of 5% per year for the next 20 years, how much will the land be worth at the end of 20 years? What is the (r) in the question?
5% (interest rate)
Assume that a piece of land is currently valued at $50,000. If this piece of land is expected to appreciate at an annual rate of 5% per year for the next 20 years, how much will the land be worth at the end of 20 years? What is the (p) in this question?
50,000 (Initial Principal amount)
Which of the following statements is true about 15-year and 30-year fixed-payment mortgages?
Assuming they can afford the payments on both mortgages, borrowers usually should choose a 30-year mortgage over an otherwise identical 15-year loan if their discount rate (opportunity cost) exceeds the mortgage rate.
The increase in the value of a one time (lump sum) investment that grows at a given rate will be greatest with ______ compounding. Multiple choice question. - quarterly - monthly - annual - daily
Daily
As the opportunity cost of waiting for future cash flows increases, the present value of those future cash flows ______.
Decreases
Consider a mortgage with discount points paid to the lender and some up-front financing costs paid to third parties. If prepayment prior to maturity occurs, which of the following will be the highest?
EBC
Lender's yield differs from effective borrowing cost (EBC) because
EBC accounts for additional third-party up-front expenses paid by the borrower that lender's yield does not account for. Correct
What amount invested at the end of each year at 10 percent annually will grow to $10,000 at the end of five years? (solve?)
End of year payment: FV:10,000 I/Y:10% N:5 (put into calc) then press, CPT & PMT key
Opportunity cost is the return the investor is forgoing on an alternative investment of _______ risk in order to invest in the current opportunity.
Equal
A cash inflow or outflow that is forecasted to occur once over the analysis period, should be entered in the Blank______ register. - FV - PMT - PV - I
FV
Assume that a piece of land is currently valued at $50,000. If this piece of land is expected to appreciate at an annual rate of 5% per year for the next 20 years, how much will the land be worth at the end of 20 years? What type of formula is this?
FV=Px(1+r)^n
True or false: All else the same, a change in the discount rate affects the present value of a 15-year loan more than a 30-year loan.
False
True or false: When the loan is closed, the borrower must pay a number of up-front financing costs. All of these costs (fees) should always be included in the calculation of lender's yield.
False
True or false: Theoretically, treasury bills (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.
False -- By investing in T-bills, you postpone some current consumptions. Therefore, the returns on T-bills should be positive.
True or false: An annuity due is defined as a fixed amount of money paid or received at the end of every period. True false question.
False --- Annuity dues are paid or recieved at the beginning of every period
The compounding of interest causes the value of an investment to grow at a(n) _____ rate
Increasing
Which of the following characteristics describe(s) the type of properties that are the focus of the quarterly RERC survey?
Market values greater than $10 million Relatively new
A fixed (level) cash inflow or outflow (ex., monthly or annually) should be entered in the
PMT register
If a landowner purchased a vacant lot six years ago for $25,000, assuming no income or holding costs during the interim period, what price would the landowner need to receive today to yield a 10 percent annual return on the land investment?
PV: 25,000 n=6 I/Y=10 Press CPT & FV
What is the most you could pay today to receive $50 in one year and $60 in the second year if you can earn 15 percent interest on alternative investments of similar risk? (what is the formula?)
PV= FV/(1+r)^n
On a level-payment loan with 12 years (144 payments) remaining, at an interest rate of 9 percent, and with a payment of $1,000, the current balance is
PV= PMT x [1-(1+r)^-n)/r] PMT: 1,000 r: 9%/12 (0.75%) n: 12x 12 (144 months)
Annuity due
Paid or received at the end of the period
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, while Company B's shares are worth $25 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)? - Sell short company B's shares, buy the same number of company A's shares. - Sell short company A's shares, buy the same number of company B's shares. - Buy company A's shares only. -Buy company B's shares only.
Sell short company A's shares, buy the same number of company B's shares.
Which of the following statements is correct? Multiple choice question. - The cash flows for an annuity due must all occur at the beginning of each period. - If an uneven cash flow stream has regular intervals, such as once a year, then it is an annuity. - The cash flows for an ordinary annuity all occur at the beginning of each period. - The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month.
The cash flows for an annuity due must all occur at the beginning of each period.
Which of the following statements is correct? Multiple choice question. - Timelines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. - Timelines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. - A timeline is not meaningful unless all cash flows occur annually. - Timelines are not useful for visualizing complex problems prior to doing actual calculations.
Timelines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.
All else equal, a 30-year loan has higher interest rate risk (or price risk) than a 15-year loan, and thus is more sensitive to discount rate changes.
True
True or false: 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.
True
True or false: The internal rate of return (IRR) is the discount rate that makes the present value of cash inflows from a particular investment equal to the present value of the cash outflows.
True
Which of the following investments is generally considered the least risky?
U.S. Treasury securities
Timelines are useful because they allow us to __________ the time pattern of money returns.
Visualize
Assume an investment is expected to be worth $10,000 at the end of ten years and that you expect to earn 10% (annually) on investments of similar risk. The present value of this investment opportunity to you is therefore $3,855. Which of the following is true?
You're happy to pay $3,000 for this investment today. If you invested $3,000 for 10 yrs. at 10% you wouldn't accumulate $10,000 at the end of 10 yrs.
A characteristic of a partially amortized loan is
a balloon payment is required at the end of the loan term.
Adjustable rate mortgages commonly have all the following except
an inflation index.
If a mortgage is to mature (i.e., become due) at a certain future time without any reduction in the original principal balance, this is called
an interest-only mortgage.
When you invest in a risky investment, you should expect to earn:
at least what you could earn on an alternative investment of equal risk.
The dominant home loan type originated by most financial institutions is the
fixed-payment, fully amortized mortgage
All else equal, the future value of an annuity due will be _____ the future value of a "regular" annuity. Multiple choice question.
greater than
An investment is expected to be wealth increasing if the NPV is______ zero.
greater than
According to the RERC data displayed in Exhibit 14-2, mean required rates of return on high quality real estate investments
have been trending downward since 2009
The "total" yield on an investment opportunity
is equal to current yield plus the appreciation yield
What is the present value of $500 received at the end of each of the next three years and $1,000 received at the end of the fourth year, assuming a required rate of return of 15 percent?
multiple present value: CF1, CF2, CF3= $500 CF4= 1000 i=15% CPT key
As required by Federal Reserve Regulation Z, which of the following characteristics must be accounted for when calculating APR?
origination fees discount points
The maximum amount the lender should be willing to lend today should be equal to the ______ of the expected mortgage payments, discounted at the _____.
present value, lender's opportunity cost
If the (going-in) IRR exceeds the investor's required rate of return, the investor
should accept the investment if she has the required equity investment available
The required calculation of annual percentage rate (APR) by the lender is a result of
the Truth-in-Lending Act of 1968.
On a fixed-rate, level payment mortgage, the present value of the remaining payments at any point in time is equal to
the present value of the remaining payments discounted at the contract rate of interest
As the perceived risk of expected future cash flows increases,
the required (expected) return should increase
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
the time value of money
In the real estate appraisal business, the IRR is often referred to as the _______
total yield
