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177 Cards in this Set

  • Front
  • Back

In a mortgage loan, the borrower alwayscreates two documents: a note and a mortgage. Which of the following pieces ofinformation is provided in the mortgage?


A. Howthe interest rate is to be computed.


B.Whether the borrower has the right to prepay the principal during the term ofthe loan, and any prepayment penalties that would be incurred as a result.


C.Whether the borrower is released from liability for fulfillment of thecontract.


D. Anunambiguous description of the property that is being pledged as collateral forthe loan.


D. An unambiguous description of the property that is being pledged as collateral for the loan.

Asignificant number of mortgage loans use adjustable interest rates, in whichthe interest rate of the loan is tied to an index rate that fluctuates overtime. For income-producing property, the most common index rate is the:


A.one-year U.S. Treasury constant maturity rateB. primerate


C. LondonInterbank Offered Rate (LIBOR)


D.cost-of-funds index


C. LondonInterbank Offered Rate (LIBOR)


Added tothe index of the adjustable rate is a margin, which is the lender’s “markup.”For standard Adjustable Rate Mortgage (ARM) loans, the average industry marginhas been stable at approximately:


A. 75basis points


B. 175basis points


C. 275basis points


D. 375basis points


C. 275 basis points

(on the test)


MostAdjustable Rate Mortgage (ARM) loans have been marketed with a temporarilyreduced interest rate commonly referred to as a:


A. ratecap


B. teaserrate


C.payment cap


D.prepayment rate


B. teaser rate

Formost mortgage loans on commercial real estate, the right of prepayment isconstrained through a prepayment penalty. Which of the following types ofprepayment penalties requires a borrower to provide the lender with somecombination of U.S. Treasury securities that will serve to replace the cashflows of the loan being paid off?


A.Yield-maintenance prepayment penalties


B.Prepayment lockout


C.Defeasance prepayment penalty


D.Curtailment penalty


C.Defeasance prepayment penalty


Becausethe mortgage conveys a complex claim for a long period of time, clauses areincluded in anticipation of possible future complications. Which of thefollowing clauses requires a borrower to make monthly deposits into an accountin order to pay obligations such as property taxes, community association fees,or causality insurance premiums?


A. Demandclause


B.Insurance clause


C. Escrowclause


D.Exculpatory clause


C. Escrow clause

Certainmortgage loans contain a due-on-sale clause, which gives the lender the rightto terminate the loan at sale of the property. Which of the following types ofloans is the most likely to contain a due-on-sale clause?


A.Federal Housing Administration (FHA) loan


B.Veterans Affairs (VA) loan


C.Conventional home loan


D. Anassumable home loan

C. Conventional home loan

(on the test)


Standardmortgage loans require monthly payments typically composed of two components:interest and principal repayments. When scheduled mortgage payments areinsufficient to pay all of the accumulating interest, causing some interest tobe added to the outstanding balance after each payment shortfall, the loan issaid to be:


A. fullyamortizing


B.partially amortizing


C.nonamortizing


D.negatively amortizing

D. negatively amortizing

With moststandard home loans, the lender can hold the borrower personally liable in theevent of a default. Such loans are commonly referred to as:


A.recourse loans


B.nonrecourse loans


C.conforming loans


D.nonconforming loans


A. recourse loans

In amortgage agreement, the borrower conveys to the lender a security interest inthe mortgage property. The lender, i.e. the individual who receives themortgage claim, is known as the:


A. broker


B.mortgagor


C. agent


D.mortgagee

D. mortgagee

Violationsof the requirements of a note that do not disrupt the payments on the loan tendto be viewed as “technical” defaults. In practice, how many days must a paymentbe overdue in order for lenders to treat a default as serious (i.e., asubstantive default)?


A. Oneday


B. 30days


C. 60days


D. 90days

D. 90 days

When aborrower defaults on the payment requirements of a loan, there are severaloptions that the lender has at its disposal. When the lender allows theborrower simply to convey the property to the lender rather than pursuing acourt supervised process of terminating all of the borrower’s claims ofownership of the property, this is commonly referred to as:


A.Bankruptcy


B.Foreclosure


C. Deedin lieu of foreclosure


D. Equityright of redemption


C. Deed in lieu of foreclosure

Foreclosure is considered the ultimaterecourse of the lender because it allows the lender to bring about sale of theproperty to recover the outstanding indebtedness. All of the followingstatements regarding foreclosure are true EXCEPT:


A. Foreclosure is a costly process forall parties involved.


B. Only those claimants who are properlynotified and engaged in the foreclosure suit can lose their claims to theproperty.


C. When a lender forecloses on aproperty, it extinguishes all superior liens, bringing about a free and clearsale of the property.


D. The net recovery by a lender from aforeclosed loan seldom exceeds 80 percent of the outstanding loan balance andcommonly is much less than this amount.


C. When a lender forecloses on a property, it extinguishes all superior liens, bringing about a free and clear sale of the property.

The difference between judicialforeclosure and power of sale in the treatment of defaulted mortgages can besignificant. All of the following statements regarding power of sale are trueEXCEPT:


A. The power of sale treatment is fasterthan judicial foreclosure


B. The foreclosed property is typicallysold through a public auction administered by the court.


C. It is less costly for power of sale tobe employed than judicial foreclosure.


D. Typically, lenders must give properlegal notice to the borrower, advertise the sale property, and allow a requiredpassage of time before the sale.


B. The foreclosed property is typically sold through a public auction administered by the court.

The risk of bankruptcy tends to travelwith the risk of foreclosure since both can result from financial distress. Knownpopularly by its section in the Federal Bankruptcy Code, which of the followingtypes of bankruptcy is a court-supervised workout for a troubled business?


A. Chapter 1 bankruptcy


B. Chapter 7 bankruptcy


C. Chapter 11 bankruptcy


D. Chapter 13 bankruptcy


C. Chapter 11 bankruptcy

When abuyer acquires a property having an existing mortgage loan, a decision must bemade as to whether or not the subsequent owner of the property can preserve theloan. If the buyer does not add his or her signature to the note, the buyerdoes not take on any personal liability. In this case, the buyer is said to:


A. assumethe old loan


B.purchase the property subject to the existing loan


C. obtainthe property through the use of a contract for deed.


D.foreclose on the property


B. purchase the property subject to the existing loan

(on the test)


Most realestate loans have a definite term to maturity, stated in years. The majority ofhome loans will typically have a term to maturity between:


A. 1-5years


B. 5-7years


C. 7-15years


D. 15-30years


D. 15-30 years

It ispossible to have a secured real estate loan without a mortgage through the useof a contract for deed. In contrast to the standard real estate sale, which ofthe following events occurs after the closing when dealing with a contract fordeed?


A. Offer


B.Acceptance


C.Possession of the property passes to the buyer


D. Title to the property passes to the buyer


D. Title to the property passes to the buyer

Congresshas enacted a number of regulations that have established criteria forevaluating home loan applicants and mandating disclosures in the origination ofhome loans. Which of the following congressional acts requires importantdisclosures concerning the cost of consumer credit, including the computationof the annual percentage rate (APR)?


A. EqualCredit Opportunity Act (ECOA)


B.Truth-in-Lending Act (TILA)


C. RealEstate Settlement Procedures Act (RESPA)


D. HomeOwnership and Equity Protection Act (HOEPA)


B. Truth-in-Lending Act (TILA)

. Inaddition to numerous congressional acts that focus more on national regulation,laws have been created that affect the practice of home mortgage lending at acommunity or neighborhood level. For example, laws have been enacted to preventlenders from avoiding certain neighborhoods without regard to the merits of theindividual loan applications, a practice more commonly referred to as:


A.rescinding


B.redlining


C.assuming


D.holdout


B. redlining

Assume that an individual has just losthis job and has been consistently late paying his bills. The bank recognizesdeterioration in the individual’s credit score and has notified him that hemust pay his home equity line of credit in full. The mortgage clause that makesthis possible is known as the:


A. demandclause


B.insurance clause


C. escrowclause


D.exculpatory clause


A. demand clause

Theability of homeowners to prepay the principal on their outstanding mortgagebalance creates cash flow uncertainty for the lender. As a result, the lendermay wish to prohibit prepayment on a mortgage loan for a specified period oftime after its origination. This is accomplished through which of thefollowing?A. A. Defeasance


B. B. Yield Maintenance Provision


C. C. Demand Clause


D. D. Lockout Provision

D. D. Lockout Provision

Incertain states, such as the state of Georgia, there is a temporary transfer oftitle to the lender at the time the mortgage loan is made. The borrower thenwould obtain the rights to the title once the loan has been repaid. Thesestates are referred to as:


A. Titletheory states


B. Lientheory states


C.Conforming states


D.Nonconforming states


A. Title theory states

A specialcontract in which the borrower pledges the mortgaged property as security tothe lender is commonly referred to as the:


A.Mortgage (Deed of Trust)


B.Listing Contract


C. Note


D. Assignment of Mortgage

A. Mortgage (Deed of Trust)

Even after a property goes intoforeclosure, it is still possible for the borrower to reclaim the property as long as they produce theoutstanding mortgage balance and all foreclosure costs incurred to that point. In a state such asFlorida, this right may even extend beyond the date of the foreclosure sale. When this occurs, this right ismore commonly referred to as:


A. Equityof redemption


B.Statutory redemption


C.Strategic default


D. Substantive default

B. Statutory redemption

In an attempt to regulate home mortgagelending after the mortgage crisis of 2007, which of the following acts createdan independent oversight agency tasked with the responsibility of overseeingand enforcing Federal consumer financial protection laws, enforcinganti-discrimination laws in consumer finance, restricting unfair, deceptive orabusive acts or practices, receiving consumer complaints, promoting financialeducation, and watching for emerging financial risks for consumers?


A. EqualCredit Opportunity Act (ECOA)


B.Truth-in-Lending Act (TILA)


C. RealEstate Settlement Procedures Act (RESPA)


D. Dodd-Frank Wall Street Reform and ConsumerProtection Act

D. Dodd-Frank Wall Street Reform and Consumer Protection Act

If a homeowner in mortgage distress owesmore than the value of the home, and is unable make the loan manageable byrefinancing or modifying the mortgage, the next recourse often is a short saleof the property. All of the following statements are true regarding a shortsale EXCEPT:


A. Legal costs should be lower with ashort sale than with foreclosure


B. A short sale usually enables a bettersale price and a faster sale than foreclosure


C. A short sale is less damaging to theborrower’s credit than a foreclosure, thereby enabling the borrower to beeligible for another mortgage loan sooner


D. A short sale relieves the seller ofany other outstanding obligations on the home, such as owner association feesor a second mortgage.


D. A short sale relieves the seller of any other outstanding obligations on the home, such as owner association fees or a second mortgage.

.Mortgage originators can either hold loans in their portfolios or sell them toinvestors. When a mortgage originator decides to sell mortgages to anotherinstitution, this transaction occurs in what is commonly referred to as the:


A.primary mortgage market


B.secondary mortgage market


C.over-the-counter market


D. loanorigination market


B. secondary mortgage market

Mortgageoriginators can either hold loans in their portfolios or sell them toinvestors. When a mortgage originator decides to sell mortgages to anotherinstitution, this transaction occurs in what is commonly referred to as the:


A.primary mortgage market


B.secondary mortgage market


C.over-the-counter market


D. loanorigination market


B. secondary mortgage market

Which ofthe following types of institutions has historically been the largest purchaserof residential mortgages?


A.Commercial banks


B.Savings and Loans


C.Government sponsored enterprises


D.Mortgage banking companies


C. Government sponsored enterprises

Consideredthe most common type of home loan, which of the following refers to anystandard home loan that is not insured or guaranteed by an agency of the U.S.government?


A.Conventional home loan


B.Federal Housing Administration loan


C.Veterans Affairs loan


D.Section 203 loan


A. Conventional home loan

Createdby Congress to promote an active secondary market for home mortgages, FannieMae and Freddie Mac purchase loans that meet specific underwriting standardssuch as loan size, documentation, and payment to income ratio. The loans thatFannie Mae and Freddie Mac are eligible to purchase are commonly referred toas:


A.government sponsored loans


B.conforming conventional loans


C.nonconforming conventional loans


D. FHAloans


B. conforming conventional loans

. Sinceconforming loans can be much more readily bought and sold in the secondarymortgage market, they carry a(n) _______ interest rate than comparablenonconforming loans.


A. higher


B. equal


C. lower


D. morevolatile


C. lower

.Mortgage originators often offer many types and forms of available residentialloans as part of their mortgage menu. However, the predominant form of prime conventionalmortgage remains the:


A.(fixed-rate) level payment mortgage (LPM)


B.adjustable rate mortgage (ARM)


C.subprime mortgage


D. alt-Amortgage


A. (fixed-rate) level payment mortgage (LPM)

(On the test)


Lendersgenerally require private mortgage insurance (PMI) for conventional loans over80 percent of the value of the security property. PMI protects a lender againstwhich of the following?


A. Lossesdue to default on the loan


B. Legalthreat to the lender’s mortgage claim


C.Stoppage of mortgage payment after the death of the insured borrower


D.Changes in the index rate associated with an adjustable rate mortgage

A. Losses due to default on the loan

Mortgageinsurance rates vary with the perceived riskiness of the loan. Which of thefollowing scenarios would result in a higher mortgage insurance premium?


A. Lowerloan-to-value ratio


B.Shorter loan term


C.Stronger credit record of the borrower


D. A“cash-out” refinancing loan


D. A “cash-out” refinancing loan

TheFederal Housing Administration (FHA) insures loans made by private lenders thatmeet FHA’s property and credit-risk standards. Which of the followingstatements concerning FHA insurance is true?


A. Theinsurance is paid by the lender and protects the lender against loss due toborrower default.


B. Theinsurance is paid by the borrower and protects the lender against loss due toborrower default.


C. Theinsurance is paid by the lender and protects the borrower against loss due tolender default.


D. Theinsurance is paid by the borrower and protects the borrower against loss due tolender default.

B. The insurance is paid by the borrower and protects the lender against loss due to borrower default.

FederalHousing Administration (FHA) loans differ from conventional loans in a numberof ways. All of the following statements regarding FHA loans are true EXCEPT:


A. FHAloans are targeted toward first-time homebuyers who are in slightly weakerfinancial circumstances than the typical prime conventional borrower.


B. FHAloans are more tolerant in terms of qualifying debt-to-income ratios


C. FHAloans require higher credit scores than are needed for prime conventionalloans.


D. FHAloans contain lower limits on their maximum size than are available through conformingconventional loans.

C. FHA loans require higher credit scores than are needed for prime conventional loans.

It would be hard to overstate the importanceof the Federal Housing Administration (FHA) in the history of housing finance.Which of the following instruments created by the FHA is considered the singlemost important financial instrument in modern housing finance?


A.Level-payment, fully amortizing loan


B.Adjustable rate mortgage


C.Partially-amortizing balloon loan


D.Subprime mortgage loan

A. Level-payment, fully amortizing loan

Manyolder, retired households are considered “house poor.” Which of the followingforms of loans has been designed to help mitigate this problem by offeringadditional monthly income to these homeowners in exchange for a portion oftheir housing equity?


A.Purchase-money mortgage (PMM)


B.Piggyback Mortgage


C. Homeequity loan


D.Reverse mortgage

D. Reverse mortgage

In recentyears, home equity loans have become a popular form of second mortgage. Theirpopularity has been a result of all of the following EXCEPT:


A. Lowerinterest rates than other consumer debt


B.Shorter terms than other consumer debt


C.Tax-favored status


D. Aggressive marketing by lenders


B. Shorter terms than other consumer debt

Incontrast to conventional home loans, the interest-only balloon loan requiresthe borrower to pay off the loan with a “balloon” payment equal to the originalbalance after:


A. 1-5years


B. 5-7years


C. 7-15years


D. 15-30years

B. 5-7 years

Thehybrid ARM attempts to balance the fixed payment desire of a borrower with thelender’s desire to increase interest rates if market rates rise in the future.In its most common form,known as a 2-28, the hybrid ARM will have a fixed-interest rate for:


A. 1 year


B. 2years


C. 26years


D. 28years


B. 2 years

Mortgageloans made to borrowers with normal credit quality, but who lack the necessarydocumentation of their financial circumstances typically needed to meetconforming mortgage standards would most likely be considered:


A.subprime loans


B. optionARM loans


C. hybridARM loans


D. alt-Aloans

D. alt-A loans

Sincemortgages typically have multiple costs associated with them, a borrower mayattempt to reduce these costs into a single measure in order to compare two ormore mortgages. Which of the following measures is a popular tool for comparingthe cost of several mortgages?


A.Upfront fees


B.Contracted interest rate


C. Annualpercentage rate


D. Teaserrate

C. Annual percentage rate

A commoncriticism of the annual percentage rate (APR) is that it usually understatesthe true cost of borrowing. The APR may understate the cost of borrowingbecause it assumes:


A.interest rates will always rise


B. theloan always goes to maturity


C. theactual life of the loan is shorter than maturity


D.upfront fees should be ignored


B. the loan always goes to maturity

With thearrival of subprime mortgages in recent years, a new kind of “trigger” eventbecame apparent in leading households to default. Which of the followingtrigger events is primarily associated with most defaults that have occurredduring the most recent subprime mortgage crisis?


A. Deathin the family


B.Divorce


C.Unemployment


D. Mortgage payment spikes

D. Mortgage payment spikes

Suppose abuyer agrees to purchase a tract of land for $40,000. The buyer is only able toobtain a mortgage for $32,000. Rather than let the deal fall through, theseller agrees to accept $4,000 in cash and a note from the buyer for theremaining $4,000. This type of transaction is commonly referred to as a:


A. conventional loan


B. home equity mortgage


C. purchase money mortgage


D. reverse mortgage


C. purchase money mortgage

Suppose ahomeowner is reluctant to refinance until he is reasonably sure that interestrates are not going to fall appreciably from where they currently are. In thiscase, the homeownerappears to be concerned about which of the following costs associated withrefinancing?


A.Opportunity cost


B. Taxconsequences


C.Default risk


D.Upfront fees


A. Opportunity cost

In recent years, mortgage lendersresponded to the demand from home buyers who were unable to put 20 percent downon their purchase and were looking to avoid the private mortgage insurance(PMI) requirement that would typically accompany such a loan by developing asecond mortgage that is created simultaneously with the first mortgage in anamount of ten percent of the value of the home. This enabled the borrower toobtain 90 percent financing while avoiding the additional cost of PMI. Theseloans are more commonly referred to as:


A. Reverse mortgages


B. Home equity loans


C. Piggyback mortgage loans


D. Subprime mortgage loans


C. Piggyback mortgage loans

When aborrower decides to stop making payments on an existing mortgage loan despitehaving the ability to make payments (typically when the home has lost value),this is more commonly referred to as a(n):


A. Equityredemption


B.Statutory redemption


C.Strategic default


D.Reverse mortgage


C. Strategic default

Aconventional mortgage loan is one that is not insured or guaranteed by anagency of the U.S. government. The lender, however, can still pursue a privatemortgage insurance (PMI) policy to provide a guarantee for the fulfillment ofthe borrower’s obligations. Typically PMI is required for all loans that have aloan to value (LTV) ratio greater than:


A. 20%


B. 40%


C. 60%


D. 80%


D. 80%

FHA mortgage insurance covers any lenderloss after conveyance of title of the property to the U.S. Department ofHousing and Urban Development (HUD). FHA mortgage insurance requires twopremiums to be paid: the UFMIP (up-mortgage insurance premium) and the MIP(monthly insurance premium). Currently, the UFMIP is what percentage of theloan for normal loans used to purchase a personal residence?


A. 1.0%


B. 1.5%


C. 2.0%


D. 4.0%


A. 1.0%

Inaddition to the UFMIP (up-front mortgage insurance premium), the owner-occupantborrower who decides to use an FHA mortgage loan will normally pay anadditional annual mortgage insurance premium (MIP) that depends on theloan-to-value ratio and the term of the loan. For loans with maturity longerthan 15 years and a loan to value ratio that is greater than 95 percent, theMIP will be what percentage of the average annual loan balance?


A. 0.25%


B. 0.50%


C. 1.10%


D. 1.15%

D. 1.15%

Assume that a veteran decides to purchasea house for $150,000 using a VA loan that amounts to $44,000. If the buyer wereto defaults on the loan, what is the maximum amount that the VAguarantees the lender?


A. $11,000


B. $22,000


C. $33,000
D. $44,000


B. $22,000

Consideringthe following information, what is the NPV if the borrower refinances the loan?Expected holding period: 15 years, Current loan balance: $100,000; Current loaninterest: 7%; Current loan mortgage payment: $898.33; Remaining term on currentmortgage: 15 years; New loan interest: 5.5%; New loan mortgage payment:$817.08; New loan term: 15 years; Cost of refinancing: $$5000. Assume that theopportunity cost is the interest rate on the new loan (5.5%).


A. -$5,000.00


B. -$56.52


C. $4,943.48


D. $9,943.48


C. $4,943.48

Consideringthe following information, what is the NPV if the borrower refinances the loan?Expected holding period: 3 years, Current loan balance: $100,000; Current loaninterest: 7%; Current loan mortgage payment: $898.33; Remaining term on currentmortgage: 15 years; New loan interest: 5.5%; New loan mortgage payment:$817.08; New loan term: 15 years; Cost of refinancing: $5,000. Assume that theopportunity cost is the interest rate on the new loan (5.5%).


A. -$5,000.00


B. -$1,155.27


C. $3,844.73


D. $8,844.73


B. -$1,155.27

Suppose that you are in the process ofdeciding whether or not to refinance your fixed rate mortgage at a lower rateand you are interested in using the payback period rule of thumb to help you inyour decision. Your lender has informed you that the cost of refinancing wouldbe $4,300. If your original monthly mortgage payment was $1,250 and your newmonthly mortgage payment would be $1,150 after refinancing, determine thepayback period.


A. 3 months


B. 4 months


C. 43 months


D. 158 months


C. 43 months

Suppose you have just purchased yourfirst home for $300,000. At the time of purchase you could afford to commit 20%of the purchase price to a down-payment. Suppose over time you paid down the principalof the loan to $220,000 and at that point in time you can no longer make anymortgage payments (i.e., you default on the loan). If the lender were toforeclose on your property and sell it for $190,000, determine the amount ofthe loan’s principal that the lender was unable to recover due to the default.


A. $30,000


B. $50,000


C. $240,000
D. $300,000


A. $30,000

Suppose you have just purchased yourfirst home for $300,000. At the time of purchase you could only afford tocommit to a down-payment of $15,000. In order to make the loan, the lenderrequires you to obtain private mortgage insurance (PMI) on their behalf.Suppose over time you paid down the principal of the loan to $280,000 and atthat point in time you can no longer make any mortgage payments (i.e., youdefault on the loan). If the lender were to foreclose on your property and sellit for $228,000, what would the lender’s loss of principal be taking intoconsideration the protection of mortgage insurance? (Let’s assume that the PMIin this case covers the top 30% of the loan)


A. $0


B. $52,000


C. $57,000


D. $72,000


A. $0

Suppose you are interested in taking amortgage loan for $250,000 in order to purchase your principal residence. Yourlender has suggested that you might be interested in taking an FHA loan. Inorder to do so, you must pay an additional up-front mortgage insurance premium (UFMIP) of 1.0% of the mortgagebalance. If the interest rate on the fully-amortizing mortgage loan is 5% andthe term is 30 years, what is your monthly mortgage payment assuming the UFMIPis financed?


A. $1,342.05


B. $1,355.47


C. $1,498.88


D. $2,500


B. $1,355.47

Suppose you are interested in taking anFHA mortgage loan for $350,000 in order to purchase your principal residence.In order to do so, you must pay an additional up-front mortgage insurancepremium (UFMIP) of 1.0% of the mortgage balance. If the interest rate on thefully-amortizing mortgage loan is 6% and the term is 30 years and the UFMIP isfinanced (i.e., it is included in the loan amount), what is the dollar portionof your monthly mortgage payment that is designated to cover the UFMIP?A. $20.98


B. $291.67


C. $2,119.41


D. $3,500.00


A. $20.98

Suppose you have obtained a 6%, 30 yearfully-amortizing FHA mortgage loan of $152,625 to finance the purchase of yourprimary residence. In so doing, you must pay an additional mortgage insurancepremium (MIP) of 1.10%. If the first-year average loan balance is $151,775.25,determine the first-year monthly insurance premium payment.


A. $139.13


B. $1,025.69


C. $1,669.53


D. $1,678.88

A. $139.13

In afixed-term, level-payment reverse mortgage, sometimes called a reverse annuitymortgage, or RAM, a lender agrees to pay the homeowner a monthly payment, orannuity, and expects to be repaid from the homeowner’s equity when he or shesells the home or obtains other financing to pay off the RAM. Consider ahousehold that owns a $150,000 home free and clearof mortgage debt. The RAM lender agrees to a $100,000 RAM for 10 years at 6percent. Assume payments are made annually, at the beginning of each yearto the homeowner. Calculate the annual payment on the RAM.


A.$7,157.35


B.$7,586.80


C.$12,817.73


D.$13,586.80

A. $7,157.35

(on the test)


Realestate brokers serve as intermediaries by bringing buyers and sellers togetherin the real estate market. For this service, brokers are paid what is commonlyreferred to as a:


A.commission


B.licensing fee


C.recovery fee


D.listing fee

A. commission

Theimportance of brokers in the real estate market is often overlooked. In theabsence of a real estate broker, one would expect all of the following to betrue EXCEPT:


A. Theasking price would most likely be higher, on average, than in the case where abroker was involved because the seller is in total control of the sale


B. Aseller would most likely rely on a “thinner” market (i.e. the seller has accessto fewer prospective buyers)


C. Itwould be more difficult for an individual to buy aproperty


D. Buyerswould be more inclined to negotiate prices downward by at least the value of atypical commission.


A. The asking price would most likely be higher, on average, than in the case where a broker was involved because the seller is in total control of the sale

Realestate brokers operate under the law of agency, which gives a broker the rightto act for a principal in trying to buy or sell a property. In the basicprincipal-agent relationship of real estate brokerage, real estate brokers actin the capacity of a:


A.Universal agent


B.General agent


C.Special agent


D.Undercover agent


C. Special agent

In actingas an agent for another person, the broker carries several specialresponsibilities, which by law must be adhered here to throughout thetransaction process. These responsibilities constitute what is commonlyreferred to as a:


A.Subagency relationship


B. Dualagency relationship


C.Fiduciary relationship


D. Openlisting relationship


C. Fiduciary relationship

(on the test)


Modernreal estate brokerage normally relies on a multiple listing service (MLS)through which brokers have access to each other’s listings. Which of thefollowing types of agency agreements is established with the use of a MLS?


A. Singleagency agreement


B.Subagency agreement


C. Dualagency agreement


D.Designated agent agreement

B. Subagency agreement

In dualagency, conflicts of interest may arise since a single broker has both thelisting contract with the seller and a buyer agency agreement with thepurchaser. One way that states have attempted to deal with this issue is todevelop a new type of brokerage relationship in which the broker assists thebuyer and seller, but does not represent either party. This type of brokeragerelationship is commonly referred to as:


A.unintended dual agency


B.universal agency


C.transaction brokerage


D.multiple listing


C. transaction brokerage

Statelicensing laws generally prescribe two levels of real estate brokeragelicensing: the broker license and the salesperson license. Which of thefollowing responsibilities is an individual with a salesperson licensepermitted to do?


A. Ownand operate a real estate brokerage business


B. Handlemoney in trust for clients


C.Negotiate listing contracts or contracts for sale


D. Complete legal documents used in sales andleases in their own name


C. Negotiate listing contracts or contracts for sale

All 50states have licensing laws that regulate persons and companies that engage inthe brokerage business. Interpreting and enforcing state licensing laws fallsunder the responsibilities of which of the following parties?A. Broker


B. Realestate commission


C.National Association of Realtors


D.Salesperson


B. Real estate commission

One ofthe traditional requirements for individuals who wish to obtain a brokeragelicense has been to demonstrate financial capacity to cover damage judgmentsbrought against them by clients. In order to address this concern, some stateshave required licensees to first obtain:


A.Private mortgage insurance (PMI)


B. Errorsand omission insurance


C.Deposit insurance


D. Hazardinsurance

B. Errors and omission insurance

Statelicensing laws prescribe behavioral requirements with which licensees mustcomply to keep their licenses. Licensing laws generally seek to prevent brokersfrom partaking in all of the following activities EXCEPT:


A.Handling money in trust for clients


B. Takingkickbacks without the employer’s knowledge


C.Offering the property at terms other than those specified by clients


D.Failure to submit all offers to the client

A. Handling money in trust for clients

It iscommon for real estate firms to identify submarkets, such as property types orparticular sections of a city, in which they can specialize and concentratetheir transaction activity. This practice is referred to as:


A.internet marketing


B. openlisting


C. discountbrokerage


D. marketsegmentation


D. market segmentation

Althoughthe function of commercial brokerage is the same as that of residentialbrokerage, the activities of commercial brokers usually differ considerablyfrom those of residential brokers due to fundamental differences in these twomarkets. All of the following statements regarding commercial brokerage aretrue EXCEPT:


A.Relative to residential transactions, commercial transactions tend to be larger


B. Theparties in commercial mortgage transactions are typically less knowledgeablethan those in residential transactions.


C. Animportant part of the commercial broker’s service is to provide the prospectivebuyer with reports that enable him to complete due diligence for the property


D. Commercial brokers are often required tolower their commission in order to negotiate compromises between buyers andsellers when they reach an impasse over price

B. The parties in commercial mortgage transactions are typically less knowledgeable than those in residential transactions.

Blockbusting,which involves persuading an individual to sell her home by telling her thatminority groups are moving into the neighborhood, is one form of discriminationin housing that is prohibited by which of the following acts of Congress?


A. RiegleCommunity Development and Regulatory Improvement Act


B. Secureand Fair Enforcement for Mortgage Licensing Act


C. FairHousing Act (Title VIII of the Civil Rights Act)


D. EqualCredit Opportunity Act

C. Fair Housing Act (Title VIII of the Civil Rights Act)

In recentyears, many U.S. investors have expanded their purchases of real estate intoforeign countries, and many foreign investors have held interests in U.S. realestate. This is an example of what is commonly referred to as ________________of real estate markets.


A.deregulation


B.globalization


C.disintermediation


D.industrialization


B. globalization

Criticalto any listing contract is the question of when the broker becomes entitled toa commission. Traditionally, the broker is still entitled to a commission inall of the following scenarios EXCEPT:


A. If theseller refuses to sell upon being presented with an offer meeting the originalterms and conditions


B. If theseller cannot deliver the property for any reason due to his or her fault.


C. Ifboth the buyer and seller sign a contract but then agree to cancel it.


D. If acontract is contingent upon the buyer obtaining financing and the buyer isunable to do so.


D. If a contract is contingent upon the buyer obtaining financing and the buyer is unable to do so.

There area number of different types of listing contracts that can be used whenmarketing a property. Which of the following types of listings requires thebroker to be paid a commission if any other broker, or even the owner, sellsthe property during the contract period?


A. Openlisting


B. Singlelisting


C.Exclusive agency listing


D.Exclusive right of sale listing


D. Exclusive right of sale listing

Therecent emergence of discount brokerage services has had a modest effect on theprice of brokerage services. The average commission that a broker could expectto receive today would most likely range between:


A. 1-2%


B. 3-4%


C. 5-6%


D. 7-10%


C. 5-6%

Federaland state laws prohibit discrimination in housing. However, exemptions do existdepending on the particular type of property that is being considered. All ofthe following activities could be considered exempt in specific scenariosEXCEPT:


A.Refusing to sell or rent to a person because of race.


B.Refusing to sell or rent based on familial status (i.e. having children).


C. Refusing to sell or rent to personsbased on age.


D. Refusing to sell or rent a single-family homebased on religion provided the owners do not employ the services of a broker oragent.


A. Refusing to sell or rent to a person because of race.

According to the law of agency, realestate brokers are required to observe several duties as they act as an agentfor an individual trying to buy or sell a property. Which of the followingduties refers to a broker’s obligation to be completely open and honest withthe principal?A. Disclosure


B. Confidentiality


C. Loyalty


D. Obedience

A. Disclosure

. In determining the appropriate listingcontract to be used, it is important to know whether a multiple listing service(MLS) will be employed. The MLS only accepts which of the following types oflisting contracts?


A. Openlisting


B. FSBOlisting


C.Exclusive agency listing


D.Exclusive right of sale listing


D. Exclusive right of sale listing

As anagent for the buyer or seller, a broker has 6 basic fiduciary responsibilities.Which of the following definitions best describes the responsibility of“Obedience”?


A. Brokermust follow the instructions of the principal to the limits of what is legaland ethicalB. Brokermust keep principal informed of all changes in the financials of thenegotiation


C. Brokermust not convey information about principal’s financial status or motivations


D. Brokermust never subordinate the best interest of the principal to the interests ofothers, including himself/herself

A. Broker must follow the instructions of the principal to the limits of what is legal and ethical

There area number of different types of listing contracts that can be used whenmarketing a property. Which of the following types of listings requires thebroker to be paid a commission if anyone, other than the owner, sells theproperty during the contract period?


A. Openlisting


B. FSBOlisting


C.Exclusive agency listing


D.Exclusive right of sale listing


C. Exclusive agency listing

Supposeyou are interested in selling your home and would like to clear a net value of$300,000. If you have agreed to pay your broker a commission of 5.5% (no matterwho ultimately is responsible for finding the buyer), what price must you sellthe home for in order to meet your net profit (rounded to the nearest dollar)?


A.$282,540


B.$300,000


C.$316,500


D.$317,460


D. $317,460

Christopherhas hired a real estate broker to help facilitate the sale of his home.Realizing that Christopher is most likely going to realize a loss on hisinvestment due to the recent decline in housing values in his neighborhood, thebroker has agreed to charge Christopher a lower commission rate as long asChristopher enters into an exclusive right of sale listing contract. IfChristopher ends up selling his house for $364,583 and takes home $350,000after paying the real estate broker’s commission, what was the commission ratethat the broker ended up charging?


A. 4.0%


B. 4.2%


C. 8.0%


D. 14.6%


A. 4.0%

Jonathanrecently sold his home and was able to take home $423,000 after paying the realestate broker’s commission of 6%. If the buyer was ultimately found through abuyer broker, the dollar commission will need to be split between the listingbroker and buyer broker. If the buyer broker is entitled to 40% of thecommission, what is her share of the commission rounded to the nearest dollar?


A.$10,800


B.$13,500


C.$16,200


D.$27,000

A. $10,800

Jim has hired a real estate broker to helpfacilitate the sale of his home. If the broker requires a commission of 6%, howmuch will Jim clear from the sale (after the commission has been paid) if he isable to sell his house for $478,723 (Assume that Jim has already paid off hismortgage)?


A. $424,528


B. $450,000


C. $478,723


D.$507,446


B. $450,000

Amy istrying to decide whether or not it would be beneficial to employ the servicesof a real estate broker in order to facilitate the sale of her home. She hasestimated that the marketing costs and opportunity cost associated with time spentdealing with prospective buyers amounts to $5,000. If Amy were to sell thehouse on her own for $200,000, but a broker would have been able to negotiate ahigher price of $206,350, what commission rate should Amy have been willing toaccept from a real estate broker to make her indifferent between selling thehouse on her own and hiring a real estate broker?


A. 2.4%


B. 3.1%


C. 5.0%


D. 5.5%


D. 5.5%

The successfulconveyance of real estate depends on a well-formed contract for sale since thecontract dictates the rights and type of deed involved, as well as choreographsthe entire transaction. Which of the following features of the contract forsale refers to the arrangements agreed to by the parties, such as price anddate of closing?


A.Contract terms


B.Contract conditions


C.Equitable title


D.Contingency clause


A. Contract terms

Anycontract, whether it is for the sale of real estate or some other entity, mustcontain five basic elements. However, any contract for the sale of real estatemust adhere to two additional requirements. Which of the following contractelements is an additional requirement that must be satisfied in a contract forsale of real estate that isn’t necessarily a part of other contracts?


A. Nodefects to mutual assent


B.Consideration


C. Offerand acceptance


D. Written form

D. Written form

While theprincipal parties to a transaction must be legally competent for a contract tobe valid, it is possible for a party acting on behalf of a principal to obtainthis legal right. In order for personal representatives and trustees to beauthorized to act on behalf of a principal, a legal instrument commonlyreferred to as ____________ must be in place.


A.assignment


B. powerof attorney


C. mutualassent


D.consideration

B. power of attorney

Bothparties to a valid and enforceable contract must provide consideration. In acontract for the sale and purchase of real estate, which of the followingdepicts the seller’s consideration?


A. Ameeting of the minds with the buyer.


B. Theoption to present a counteroffer.


C. Theproperty to be given up.


D. Themoney or goods that constitute the purchase price.


C. The property to be given up.

Incertain circumstances, mutual assent between the contracting parties may bebroken, thus invalidating the contract. Which of the following defects tomutual assent involves compelling a person to act by the use of force?


A. One ofthe parties is under duress.


B. One ofthe parties is under undue influence.C. One ofthe parties is under menace.


D. One of the parties is committing fraud.

A. One of the parties is under duress.

QUESTION]6. Thedistinction between legal title and equitable title is an important concept inthe contract for sale of real estate. When the buyer obtains equitable title,the seller can no longer sell the property to someone else, even though thelegal title has not officially passed on. In the contract for sale process, thecreation of equitable title occurs when:


A. Thecontract for sale is written.


B. Thecontract for sale is signed.


C. Thecontract terms are orally agreed upon.


D. Eachparty is deemed legally competent.

B. The contract for sale is signed.

(on the test)


Since theissues in many transactions are similar, brokers often use standard preprintedcontract forms. Generally, the best standard form contracts are those preparedand approved by which of the following parties?


A. Officesupply firm


B. Seller


C. LocalBoard of Realtors


D. Web source of generic legal forms

C. Local Board of Realtors

Contractsfor sale may contain sections that cause implementation of the contract todepend on the successful completion of some prior action such as the buyer’sability to obtain financing on specified terms. This type of contract iscommonly referred to as a(n):


A.contract assignment


B.equitable title


C.contract with contingencies


D.uniform settlement statement

C. contract with contingencies

Ingeneral, most contracts – including a real estate contract – can be assigned.All of the following statements regarding assignment are true EXCEPT:


A. Anytype of personal performance contracted by one party cannot be assigned withoutthat party’s permission.


B. Landcontracts are not assignable without the owner’s permission


C. Ifbuyers of real estate assign the contract, the new buyers may pay the agreedupon price and obtain title to the property.


D. When buyers assign their rights to someoneelse, they escape liability under the original contract

D. When buyers assign their rights to someone else, they escape liability under the original contract

When aparty in a contract fails to perform (e.g. breach of contract, nonperformance,or default) the other party has a variety of remedies. All of the following areremedies that an aggrieved seller may pursue EXCEPT:


A. Suefor damages.


B. Retainthe earnest money deposit as liquidated damages.


C. Agreeto rescission of the contract.


D. Sue for specific performance.


D. Sue for specific performance.

The finalstep in a real estate transaction is the closing. In most closings, which partyis responsible for seeing that the closing is completed successfully?


A. Escrowagent


B. Lender


C.Selling Broker


D.Listing broker


D. Listing broker

The RealEstate Settlement Procedures Act (RESPA) is a federal law that requiresfederally chartered or insured lenders to provide buyers and sellers withinformation on all settlement costs. According to RESPA, loan closinginformation must be prepared on a special form known as the:


A.Uniform Settlement Statement or HUD-1 form


B.Good-faith estimate of settlement costs


C.Settlement Costs and You booklet


D.Certificate of occupancy


A. Uniform Settlement Statement or HUD-1 form

While feesplitting between cooperating real estate brokers is permitted, RESPAexplicitly prohibits such actions as rebating part of the title insurancepremium to the lender who recommended or required the title insurance. Theseunearned fees are commonly referred to as:


A.commissions


B.kickbacks


C.damages


D.specific performance dues

B. kickbacks

Inaccordance with RESPA, whenever a buyer obtains a new first mortgage loan froma chartered or insured lender, when the loan is insured by the FHA orguaranteed by the VA, or when the loan will be sold to one of the federallyrelated secondary mortgage market agencies, a good-faith estimate of thesettlement costs must be provided by the lender within:


A. 3business days


B. 5business days


C. 30calendar days


D. 90calendar days

A. 3 business days

When abuyer signs an offer to purchase a property, the broker receives a monetaryamount from the purchaser of 5 or 10 percent of the purchase price. Thisdeposit is commonly referred to as the:


A.commission


B.earnest money


C.closing cost


D. titleinsurance premium

B. earnest money

Sincethe seller often has utilized the property for a portion of the year in whichthe transaction is being made, certain costs associated with the property willbe prorated at the closing. All of the following items are subject to beingprorated EXCEPT:


A. Brokercommission


B. Prepaid rent


C. Property tax


D. Mortgage interest

A. Broker commission

If property owners fail to pay theirtaxes in a timely fashion, this can create a first lien on the mortgagedproperty. In order to protect against this, lenders often require thatborrowers add what fraction of their estimated tax bill to their requiredmonthly mortgage payments?


A. 1/12


B. 1/6


C. 1/4


D. 1/2

A. 1/12

Recording documents in the public recordsinforms anyone who may have a potential interest in a property of both theowner and lender. In so doing, it provides what is commonly referred to as ____________ of aninterest in real property.


A. mutual assent


B. constructive notice


C.consideration


D.simultaneous issue


B. constructive notice

The lawsof some states require that real estate brokers provide buyers and sellers witha list of estimated closing costs before signing a contract for sale. At theclosing, it is typically which of the following party’s responsibilities to paythe full premium for an owner’s title insurance policy?


A. Buyer


B. Seller


C. Lender


D. Broker


B. Seller

At theclosing, the buyer will be credited for a number of costs that have been paidup-front (or will be paid after closing) as well as a number of proratedexpenses that account for the period of time during which the seller occupiedthe house. All of the following items detailed in the closing costs involvecredits that are commonly passed on to the buyer EXCEPT:


A.Earnest money


B. Hazardinsurance premiums


C.Property taxes


D.Mortgage interest

B. Hazard insurance premiums

The RealEstate Settlement Procedures Act (RESPA) is a federal law that requiresfederally chartered or insured lenders to provide buyers and sellers withexpectations of their closing costs prior to the closing date. When a borrower(the buyer) applies for a loan, the lender will provide him/her with which ofthe following forms that includes details pertaining to specific loaninformation and an estimate of expenses that the borrower is likely to incur atthe closing? A.Uniform Settlement Statement (HUD-1) formB.Good-faith estimate


C.Settlement Costs and You booklet


D. Certificate of occupancy


B. Good-faith estimate

When theseller in a contract for sale fails to perform (e.g. breach of contract,nonperformance, or default), the buyer has a variety of remedies. One suchremedy is to appeal to the court to force the defaulting seller to carry outthe contract. This remedy is most commonly referred to as suing for:


A.Damages.


B.Earnest.


C.Recission.


D. Specific performance

D. Specific performance

Certainclosing costs will be prorated to account for the period of time during whichthe seller occupied the house. If a transaction is scheduled to close on May17, 136 days into a 365-day year, calculate the amount that the buyer will becredited if the particular closing cost in question is estimated to be $1000for the entire year.


A.$182.19


B.$372.60


C.$624.66


D. $1000


B. $372.60

Sinceproperty taxes are paid in arrears, the buyer will be responsible for payingthem after closing. Suppose that the closing date on the home for sale isFebruary 28th of a leap year (e.g., 2012, 2016, etc). How manycalendar days would the seller be responsible for when calculating his/hershare of the property tax owed for the year in which the home was sold.A. 58days


B. 59days


C. 307days


D. 308 days

A. 58 days

. If aproperty transaction is scheduled to close on May 14th, calculatethe individual tax responsibility for the buyer if the total tax owed at theend of the year is $5,000. For this problem, assume that we are dealing with a365 day calendar year.


A. $0.00


B.$1,821.92


C.$3,178.08


D.$5,000.00


C. $3,178.08

Sincehazard insurance premiums are paid up-front, the buyer will have to reimburse(credit) the seller a portion of the premium at the closing. Suppose that theinsurance policy’s coverage began on December 15th of the prior yearand the property transaction is set to close on March 16th of a365-day year. The premium paid originally by the seller was $250. If thecoverage will expire as of the end of day December 14th in thecurrent year, what is the dollar amount that the buyer must credit the seller?


A.$0.00


B. $62.33


C.$187.67


D.$250.00

C. $187.67

Risk is the possibility that actual outcomes will vary from what wasexpected when the asset was purchased. If investors require a higher rate ofreturn for undertaking more risk, the underlying assumption is that investorsare:


A. risk neutral


B. risk averse


C. risk taking


D. hedging risk

B. risk averse

Since investors prefer to have money now rather than later, moneyreceived next week, instead of today, is not worth as much to those receivingit, assuming the magnitude of the cash flow in each period is the same. Thereforean adjustment to the prospective cash flows is required. This process isreferred to as:


A. compounding


B. discounting


C. amortizing


D. hedging


B. discounting

(on the test)


When discussing time-value-of-money it is necessary to understand somekey terminology. Which of the following terms refers to a fixed amount of moneypaid or received at the end of every period (i.e. a series of equal lump sums)?A. Future value


B. Present value


C. Ordinary annuity


D. Annuity due

C. Ordinary annuity

With compound interest, the investor earns interest on the principalamount invested plus interest on accumulated interest. Which of the followingcompounding frequencies would yield the investor the greatest ending balanceassuming all else is equal?


A. Daily


B. Monthly


C. Quarterly


D. Annually

A. Daily

Assuming all else the same, the ___________ of an annuity due will be_____________ that of an ordinary annuity.


A. future value; greater than


B. present value; equal to


C. future value; less than
D. present value; less than

A. future value; greater than

The internal rate of return (IRR) and the net present value (NPV) aretools that are widely used in real estate investment and finance decisionmaking. An investor would most likely pursue an investment if which of thefollowing circumstances was true?


A. The going-in IRR exceeds the investor’s required rate of return


B. The going-in IRR is less than the investor’s required rate of return


C. The going-in IRR exceeds the NPV


D. The going-in IRR is less than the NPV


A. The going-in IRR exceeds the investor’s required rate of return

The rate that is used to discount expected future cash flows can bethought of as the return the investor is forgoing on an alternative investmentof equal risk. In this framework, the discount rate is being thought of aswhich of the following?


A. Net present value


B. Opportunity cost


C. Closing cost


D. Future value


B. Opportunity cos

The Real Estate Research Corporation (RERC) regularly surveys a sampleof institutional investors and managers in order to gain insight into therequired returns and risk adjustments used by industry professionals whenmaking real estate acquisitions. Most of the properties that RERC examines arelarge, relatively new, located in major metropolitan areas and fully orsubstantially leased. These classifications of properties are commonly referredto as:


A. investment grade properties


B. speculative grade properties


C. net-lease properties


D. industrial properties


A. investment grade properties

Uncertainty of cash flows can vary significantly across property types.Which of the following property types is often considered to have the mostuncertain expected cash flows?


A. Multifamily


B. Industrial


C. Office


D.Hospitality

D. Hospitality

You havejust had a tenant sign a lease contract that guarantees you payments of$100,000 at the end of each year for the next five years. If you wish todetermine the present value of these future cash flows (i.e. the value of thiscash flow stream to you today), you would use which of the following time valueof money processes?


A.Compounding


B.Discounting


C.Amortizing


D.Aggregating

B. Discounting

(on the test)


Supposean investor deposits $2500 in an interest-bearing account at her local bank.The account pays 2.5% interest compounded annually. If the investor plans onwithdrawing the original principal plus accumulated interest at the end of 7years, what is the total amount that sheshould expect to receive assuming interest rates do not change?


A.$2,971.71


B.$2,974.89


C.$3,532.43


D.$11,920.93

A. $2,971.71

Supposethat a landlord is interested in renting out a two-bedroom apartment for $1000a month for the next year. The landlord requires rent to be paid at thebeginning of the month, at which point he will deposit the rental check into alocal savings account. If the annual interest that the tenant can earn on thisaccount is 5% and interest is compounded monthly, how much will the tenant havein his savings account at the end of the year?


A.$12,278.86


B.$12,330.01


C.$13,330.02


D.$15,917.13

B. $12,330.01

Aninvestor agreed to sell a warehouse 5 years from now to the tenant whocurrently rents the space. The tenant will continue to pay $20,000 rent at the end of each year including year five in which he willpurchase the building for an additional $150,000. Assuming the investor'srequired rate of return is 10%, how much is this deal presently worth to theinvestor who was willing to sell?


A. $168,953.93


B. $241, 451.07


C. $363,678.50 `


D. $1,032,475.67


A. $168,953.93

Assumingthat an investor requires a 10% annual yield over the next 12 years, how muchwould she be willing to pay for the right to receive $20,000 at the end of year12?


A.$6,053.91


B.$6,372.62


C.$62,768.57


D.$136,273.84


B. $6,372.62

Assumethat an individual puts $10,000 into a savings account that pays 3% interest,with interest being compounded monthly. The individual plans to withdraw thebalance in 5 years to buy a car. If he does not make any further deposits overthis period, how much will the individual be able to put towards his purchase?


A. $10,125.63


B. $11,592.74


C. $11,616.17


D. $58,916.03


C. $11,616.17

The purchase price of an income producingproperty today is $570,000. After analysis of the expected future cash flows,expected sales price, and expected yield, the investor determines that thefuture cash flows have a present value (PV) of $580,000. Taking intoconsideration the price of the property today, what is the net present value(NPV) of this investment opportunity, and should the investor take the deal?


A. $10,000; Yes


B. $10,000; No


C. -$10,000; Yes


D. -$10,000; No


A. $10,000; Yes

. Suppose an investor is interested inpurchasing the following income producing property at a current market price of$450,000. The prospectivebuyer has estimated the expected cash flows over the next four years to be asfollows: Year 1 = $40,000, Year 2 = $45,000, Year 3 = $50,000, Year 4 =$55,000. Assuming that the required rate of return is 12% and the estimatedproceeds from selling the property at the end of year four is $500,000, what isthe NPV of the project?


A. $8,829.96


B. $9,889.56


C. $428,113.65


D. $459,889.56


B. $9,889.56

Assume that an industrial building can bepurchased for $1,500,000 today, is expected to yield cash flows of $80,000 foreach of the next five years (with the cash flows occurring at the end of eachyear), and can be sold at the end of the fifth year for $1,625,000. Calculatethe internal rate of return (IRR) for this transaction. A. 3.14%


B. 6.78%


C. 9.20%


D. 10.37%


B. 6.78%

Assume that a piece of land is currentlyvalued at $50,000. If this piece of land isexpected to appreciate at an annual rate of 5% per year for the next 20 years,how much will the land be worth 20 years from now?


A. $100,898.99


B. $112,633.09


C. $123,860.81


D. $132,664.89


D. $132,664.89

Aninvestor originally paid $22,000 for a vacant lot 12 years ago. If the investor is able to sell the lot todayfor $62,000, what would his annual rate of return be on this investment(rounded to the nearest percent)?


A. 5%


B. 7%


C. 9%


D. 11%


C. 9%

An investor just purchased an officebuilding for $100,000. He knows for certain that he can sell the building for$110,000 in 5 years. Approximately how much does he need to charge in annual rent in order to achievea 15% annual return on the deal (rounded to the nearest hundred dollars)?


A. $2,500


B. $8,000


C. $13,500


D. $20,500


C. $13,500

Suppose abank decides to make a mortgage loan to an individual so that they may purchasea home. The homeowner will pay the bank $1500 per month in mortgage paymentsfor the next 30 years. The bank will collect the mortgage payments at the endof the month. What is this promised stream of cash flows worth to the banktoday if they could reinvest the monthly income at an annualized rate of 5% forthe entire investment horizon?


A.$23,058.68


B.$99,658.27


C.$279,422.43


D.$1,248,387.95


C. $279,422.43

Supposeyou have found a tenant who wishes to rent out your vacation home for the nexttwelve months. You are charging $800 per month in rent. You will collect thefirst rent payment today and then on the 1st of the month each monththereafter. What is the value of this investment opportunity to you today ifyou could reinvest your income at an annual rate of 3% with interest compoundedon a monthly basis?


A.$7,963.20


B.$8,202.10



C. $9,445.80


D. $9,469.42

D. $9,469.42

Supposethat a property can generate cash flows of $10,000 per year for eight years andcan sell for $80,000 at the end of the investment period. Assuming a discountrate of 10%, what is the present value of this property (Assume end of periodcash flows in your calculation)?


A.$117,320


B.$160,000


C.$133,349


D.$90,670


D. $90,670

Supposethat an industrial building can be purchased today for $2,500,000. If it isexpected to produce cash flows of $180,000 for each of the next five years(assume CFs are received at the end of each year) and can be sold at the end ofthe fifth year for $2,800,000, what is the internal rate of return (IRR) onthis investment?A. 0.09%


B. 4.57%


C. 9.20%


D. 10.37%


C. 9.20%

Uponstarting his first job after graduation, Jon has completed the necessarypaperwork to set up direct deposit of his paycheck into his savings account.After taxes, medical benefits, and retirement account contributions have been takenout of John’s gross salary, he is left with a direct deposit of $4000 at theend of each month. If John started with no other savings in his account, howmuch will John have in his savings account at the end of 12 months if he isable to earn an annual interest rate of 3%, with interest being compoundedmonthly?


A. $48,665.53


B.$48,787.19


C.$56,768.12


D.$58,471.16

A. $48, 665.53

Suppose you are starting a Ph.D. program with only $1,000 inyour savings account. The university has agreed to waive your tuition, coverall of your living expenses, and pay you an additional stipend of $2,000 at thebeginning of each month, as long as you teach one course per semester over thecourse of five years. If your savings account is able to earn 5.5% per year forthe five years that you will be in this program, how much will you haveaccumulated in your savings account by the end of the program if interest iscompounded on a monthly basis?


A. $136,445.94


B. $137,708.75


C. $139, 077.35


D. $139,708.7


D. $139,708.7

A property owner has set up a contract in which he agrees tosell a warehouse 5 years from now to the tenant who currently leases the space.The tenant has agreed to continue to pay $20,000 in rent at the end of eachyear, including year five, at which time he will purchase the building for anadditional $1,500,000. Assuming the required rate of return on a similarinvestment is 10% (annual), how much is this deal presently worth to theoriginal owner of the property?


A. $1,007,197.20B. $1,014,779.29C. $2,281,452.80D. $2,293,663.00

A. $1,007,197.20

Suppose you own a house that you arerenting out to a group of college students for the 10 month academic year. Youare charging $1000 per month in rent. You will collect the first rent paymenttoday and then on the 1st of the month each month thereafter. Whatis the value of this investment opportunity to you today if you could reinvestyour income at a rate of 6%?


A. $9,677.77


B. $9,730.41


C. $9,779.06


D. $11,677.03


C. $9,779.06

Suppose an investor is interested inpurchasing the following income producing property at a current market price of$490,000. The prospective buyer has estimated the expected cash flows over thenext four years to be as follows: Year 1 = $48,000, Year 2 = $49,440, Year 3 =$50,923, Year 4 = $52,451. Assuming that the required rate of return is 14% andthe estimated proceeds from selling the property at the end of year four is $560,000,what is the NPV of the project?


A. -$12,860.53


B. $145,574.52


C. $331,564.96


D. $477,139.47

A. -$12,860.53

(on the test)


Themonthly mortgage payment divided by the loan amount is commonly referred to asthe:


A. loanbalance


B.effective borrowing cost


C.lender’s yield


D.monthly loan constant


D. monthly loan constant

From theborrower’s perspective, the effective borrowing cost is often viewed as theimplied internal rate of return (IRR), since it takes into consideration coststhat the borrower faces, but which are not passed on as income to the lender.Included in this calculation are certain closing costs, which may consist of allof the following EXCEPT:


A. Titleinsurance


B.Mortgage insurance


C.Recording fees


D.Earnest money

D. Earnest money

Requiredby the Truth-in-Lending Act, the annual percentage rate (APR) is reported bythe lender to the borrower on virtually all U.S. home mortgage loans. The APRaccounts for all of the following EXCEPT:


A. Allfinance charges in connection with the loan, such as discount points,origination fees, and underwriting fees.


B. Allcompensation to the originating brokers if one was used by the borrower.


C. Anyprepayment of principal to be made on the loan.


D. Premiums for required forms of insurance


C. Any prepayment of principal to be made on the loan

Whenlenders charge discount points (prepaid interest) on a loan, what impact doesthis have on the loan’s yield?


A. Theyield on the loan will increase.


B. Theyield on the loan will decrease.


C. Theyield on the loan will be unaffected.


D. The yield on the loan automatically becomeszero

A. The yield on the loan will increase

For thepurposes of estimating the effective borrowing cost (EBC), only those up-frontexpenses associated with obtaining the mortgage should be included, not thesettlement costs associated with obtaining ownership of the property. With thisin mind, which of the following costs should not be included in one’scalculation of EBC?


A.Discount points


B. Loanorigination fees


C.Appraisal fee


D. Buyer’s title insurance

D. Buyer’s title insurance

Whenfully amortizing loans call for equal periodic payments over the life of theloan they are known as:


A.level-payment mortgages


B.adjustable-rate mortgages


C.interest-only mortgages


D. early-payment mortgages

A. level-payment mortgages

While avariety of loan terms are available in a lender’s mortgage menu, the mostcommon loan term on a level-payment mortgage is:


A. 7years


B. 15years


C. 30years


D. 40years

C. 30 years

Recently,15-year mortgages have increased in popularity amongst both borrowers andlenders. Which of the following groups of borrowers would typically be theleast interested in a 15-yearmortgage?


A. Maturehouseholds with minimal financial constraints


B.First-time homebuyers


C.Homeowners who are refinancing to obtain a lower rate than is available on acomparable 30-year mortgage


D.Homeowners who are interested in selling their property within five years


B. First-time homebuyers

Assumethat a borrower has a choice between two comparable fixed-rate mortgage loanswith the same interest rate, but different mortgage terms, one being a 30-yearmortgage and the other a 15-year mortgage. Under financially unconstrainedcircumstances, which of the following statements best describes the borrower’spreference?


A. Theborrower would prefer the 30-year mortgage.


B. Theborrower would prefer the 15-year mortgage.


C. Theborrower would be indifferent between the two mortgages


D. The borrower is unable to compare mortgageloans of two different maturities


C. The borrower would be indifferent between the two mortgages

Partiallyamortizing mortgage loans require periodic payments of principal, but are notpaid off completely over the loan’s term to maturity. Instead, the balance ofthe principal amount is paid at maturity in what is commonly referred to as a:


A.balloon payment


B. earlypayment


C.up-front payment


D. payment cap

A. balloon payment

With therecent popularity of adjustable-rate mortgages (ARM), lenders have begun tooffer ARMs with different adjustment periods. Which of the following ARMchoices will most likely have the highest initial rate?


A.Three-year-one-year ARM


B.Five-year-one-year ARM


C.Seven-year-one-year ARM


D. Ten-year-one-year ARM

D. Ten-year-one-year ARM

Inconsidering a 3/1 adjustable-rate mortgage (ARM), the interest rate will befixed for how many years?


A. Oneyear


B. Twoyears


C. Threeyears


D. Fouryears


C. Three years

Onereason why adjustable-rate mortgages (ARMs) have become popular has to do withthe impact that they have on the interest rate risk that is borne by theparties involved. If interest rates were to rise on a level-payment mortgage(LPM) the interest rate risk of the loan would typically be borne by:


A. theborrower only


B. thelender only


C. boththe borrower and lender


D.neither the borrower nor the lender

B. the lender only

To encourage borrowers toaccept adjustable rate mortgages (ARMs) rather than level-payment mortgages,mortgage originators generally offer an initial short-term introductory ratethat is less than the prevailing market mortgage rate. This rate is referred toas a(n):


A. margin rate


B. teaser rate


C. index rate


D. discount rate


B. teaser rate

The APRcan be a controversial measure of borrowing cost because it tends to:


A.overstate the true borrowing cost by assuming we hold mortgage until maturity


B.understate the true borrowing cost by assuming we hold mortgage until maturity


C.overstate the true borrowing cost by assuming we do not hold mortgage untilmaturity


D. understate the true borrowing cost byassuming we do not hold mortgage until maturity

B. understate the true borrowing cost by assuming we hold mortgage until maturity

Given thefollowing information on a fixed-rate fully amortizing loan, determine themaximum amount that the lender will be willing to provide to the borrower. LoanTerm: 30 years, Monthly Payment: $800, Interest Rate: 6%.


A. $6,707


B.$9,295.15


C.$13,333


D.$133,433

D. $133,433

Given thefollowing information on a 30-year fixed-payment fully-amortizing loan,determine the remaining balance that the borrower has at the end of sevenyears. Interest Rate: 7%, Monthly Payment: $1,200.


A.$17,143


B.$79,509


C.$164,402


D. $180,369

C. $164,402

Giventhe following information on an interest-only mortgage, calculate the monthlymortgage payment. Loan amount: $56,000, Term: 15 years, Interest Rate: 7.5%.


A. $169.13


B. $350


C. $519.13


D. $4,200

B. $350

Given thefollowing information, calculate the balloon payment for a partially amortizedmortgage. Loan amount: $84,000, Term to maturity: 7 years, Amortization Term:30 years, Interest rate: 4.5%, Monthly Payment: $425.62. A. $9,458


B. $30,620


C. $73,102


D. $84,000


C. $73,102

Given the following information about a fully amortizingloan, calculate the lender’s yield (rounded to the nearest tenth of a percent).Loan amount: $166,950, Term: 30 years, Interest rate: 8 %, Monthly Payment:$1,225.00, Discount points: 2.


A.7.7%


B. 8.0%


C. 8.2 %


D.10.0 %


C. 8.2 %

Given the following information, calculate the effectiveborrowing cost (rounded to the nearest tenth of a percent). Loan amount:$166,950, Term: 30 years, Interest rate: 8 %, Monthly Payment: $1,225.00,Discount points: 2, Other Closing Expenses: $3,611.


A. 7.7%


B. 8.2%


C. 8.5%


D. 9.1%

C. 8.5%

Suppose a potential home buyer is interested in taking a$500,000 mortgage loan that has a term of 30 years and a fixed mortgage rate of5.25%. What is the monthly mortgage payment that the homeowner would need tomake if this loan is fully amortizing?


A.$552.50


B.$2,761.02


C.$17,820.72


D.$33,458.47


B. $2,761.02

You have taken out a $350,000, 3/1 ARM. The initial rate of6.0% (annual) is locked in for 3 years. Calculate the outstanding balance onthe loan after 3 years. The interest rate after the initial lock period is6.5%. (Note: the term on this 3/1 ARM is 30 years)


A.$2,098.43


B.$2,183.95


C.$336,294.25


D.$347,901.57

C. $336,294.25

You have taken out a $300,000, 5/1 ARM. The initial rate of5.4% (annual) is locked in for 5 years. Calculate the payment after recastingthe loan (i.e., after the reset) assuming the interest rate after the initiallock period is 8.0%. (Note: the term on this 5/1 ARM is 30 years)


A.$1,684.59


B.$1,784.79


C.$1,887.75


D.$2,138.02


D. $2,138.02

You have taken out a $225,000, 3/1 ARM. The initial rate of5.8% (annual) is locked in for 3 years and is expected to increase to 6.5% atthe end of the lock period. Calculate the initial payment on the loan. (Note:the term on this 3/1 ARM is 30 years)


A.$1,320.19


B.$1,422.15


C.$1,874.45


D.$1959.99

A. $1,320.19

Given the following information, calculate the EffectiveBorrowing Cost (EBC). Loan amount: $175,000, Term: 30 years, Interest rate: 7%, Payment: $1,164.28, Discount points: 1, Origination fee: $3,250. Assume theloan is held until the end of year 10.


A. 0.6%


B. 3.8%


C. 7.0%


D. 7.4%


D. 7.4%

Supposeyou have taken out a $200,000 fully-amortizing fixed rate mortgage loan thathas a term of 15 years and an interest rate of 4.25%. In month 2 of themortgage, how much of the monthly mortgage payment does the principal repaymentportion consist of?


A.$705.51


B.$708.33


C.$796.22


D. $799.04


A. $705.51

Supposeyou have taken out a $125,000 fully-amortizing fixed rate mortgage loan thathas a term of 15 years and an interest rate of 6%. After your first mortgagepayment, how much of the original loan balance is remaining?A.$1,054.82B.$120,603.78C.$124,570.18D.$124,875.56


C. $124,570.18

Assumeyou have taken out a partially amortizing loan for $325,000 that has a term of7 years, but amortizes over 30 years. Calculate the balloon payment at maturity(Year 7) if the interest rate on this loan is 4.5%.


A.$1,646.73


B.$118,468.21


C.$282,835.42


D.$324,572.02


C. $282,835.42

Let’sassume that you have just taken out a mortgage loan for $200,000 with anorigination fee of 2 points due upfront. The mortgage term is 30 years and themortgage rate is fixed at 4%. What is the cost of the origination fee in dollarterms?


A.$400.00


B.$954.83


C.$4000.00


D.$4954.83


C. $4000.00