Take Home Midterm Due on March 8, 2017

You may use all available resources, including the notes and power points, the text or
any real estate text book (a good text is Real Estate Finance and Investments by
Brueggeman and Fisher) and any credible websites for answers.

PART 1 TRUE/FALSE

1. Inflation makes very little difference to lenders of and investors needing money.

2. Lenders and investors worry about default, interest rate, marketability, and liquidity risks.

3. Determining a loan balance on a fixed rate mortgage is a simple future value of an annuity
problem.

4. Truth-in-lending requires the borrower to tell the truth on the loan application.

5. The annual percentage rate, disclosed at the loan closing, closely approximates the
borrowers true cost of funds.

MULTIPLE CHOICE

6. A borrower takes out a 30-year mortgage loan for $250,000 with an interest rate of 5%.
What would the monthly payment be?

(A) $694
(B) $1,042
(C) $1,342
(D) $1,355
(E) Not enough information

7. A borrower takes out a 30-year mortgage loan for $250,000 with an interest rate of 5% and
monthly payments. What portion of the first months payment would be applied to interest?
(A) $694
(B) $1,042
(C) $1,342
(D) $1,355
(E) Not enough information

8. A borrower has a 30-year mortgage loan for $200,000 with an interest rate of 6% and
monthly payments. If she wants to pay off the loan after 8 years, what would be the
outstanding balance on the loan?
(A) $84,886
(B) $91,246
(C) $146,667
(D) $175,545
(E) Not enough information

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9. Which of the following is NOT a determinant of interest rates for single family residential
mortgages?

(A) The demand and supply of mortgage funds

(B) Inflation expectations
(C) Liquidity
(D) The demand and supply of apartments

10. Risk is an important component of interest rates. Which of the following risks is NOT a
determinant of interest rates?

(A) Default risks

(B) Interest rate risks
(C) Institutional risks
(D) Marketability risks

11. One of the most popular amortizing mortgages today is the constant payment mortgage.
Which of the following characterizes the components of the CPM payment over the life of
the loan?

Interest Amortization Payment

(A) Decreasing Decreasing Decreasing
(B) Increasing Decreasing Constant
(C) Decreasing Increasing Constant
(D) Constant Constant Constant

12. At the end of five years, calculating the outstanding loan balance of a constant payment
mortgage is simply the:
(A) Present value of a single amount
(B) Future value of a single amount
(C) Present value of an ordinary annuity
(D) Future value of an ordinary annuity

13. Which of the following closing costs do not increase the lenders effective loan yield?

(A) Discount points

(B) Prepayment penalties
(C) Title insurance charges
(D) Origination fees

14. Demand for a mortgage loan is considered:

(A) Stable demand
(B) Derived demand
(C) Interest rate demand
(D) Nominal demand

15. APR stands for which of the following?

(A) Annual percentage rate
(B) Amortized percentage regulator
(C) Accrued percentage rate
(D) Annual percentage regulator

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Short Answers.

Please answer the following.

1. What is the connection between the Truth-in-Lending Act and the APR?

2. An expected inflation premium is said to be part of the interest rate. What does this mean?

3. The mortgage market is said to be bifurcated in two distinct delivery systems (a) the
primary market system and the secondary market system. Briefly describe how these two
markets work and the primary risks in each.

4. Suppose there is an increase in the demand for apartment units. Which market will be
affected first? On a neat and well labeled diagram, please trace and explain the effects of
this increase in demand.

Problem.
1. A trusted real estate broker tells you that the 15-unit apartment building that you have been
looking at is now on the market for sale. When you asked him for a pro-forma, he provided
you with the information in the table below. Use this information to answer the questions
asked.

2017 2018 2019

Net rental income $385,000 $405,150 $425,500
Operating expenses $240,500 $250,250 $260,250
Net Operating Income (NOI) $144,500 $154,900 $165,250

i. If your required rate of return is 12%, what is the most you would offer for this
property?
ii. If the sellers selling price is firm at $350,000, would you buy it? Why?
iii. If your bank is willing to lend you 80% of the purchase price, secured by a first
mortgage lien on the property, what would the promissory note list as the principal
you owe the bank.
iv. If the bank priced this loan at 7.5% fixed rate, constant payment, fully amortizing
mortgage for three years, what is the annual principal and interest payment during
the term of the loan?
v. Assume you accepted the banks financing terms and acquired the property for
$350,000. What is the net present value (NPV) and the internal rate of return (IRR)
of this investment?
vi. What is the average annual growth of the property if the value is $475,000 at the
end of year 3?

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