Chapter 13 Flashcards
Which of the following elements are considered in determining appropriate rates of interest on loans?
(1) The credit rating of the borrower
(2) The type of property used for security
(3) The amount of administrative attention required on the loan
(4) All of the above
4
Ally has recently received an interest only loan for $75,000 to operate a food cart in downtown Vancouver. The loan has an interest rate of 6% per annum, compounded monthly, and requires interest only payments every month. How much are the monthly interest only payments that Ally makes if the duration of the loan is two years?
(1) $750
(2) $500
(3) $375
(4) $1,000
3
j12=6% n=24 pv pmt fv 75,000 ? -75,000 =375.00
Which of the following is characteristic of a mortgage as an investment?
(1) mortgages are not “unique”, which makes them easy to trade
(2) requires a high degree of administrative work
(3) requires a low initial outlay of capital
(4) All of the above are characteristics of a mortgage as an investment.
2
On a straight line principal reduction loan, the monthly payment:
(1) is a constant amount each month.
(2) pays interest only.
(3) pays principal only.
(4) declines over time.
4
By extending the amortization period of a loan:
(1) the mortgage loan is paid off faster which reduces the amount of interest paid by the borrower.
(2) the size of the required payment will be larger.
(3) the loan contract period becomes longer and the loan will be classified as a fully amortized loan.
(4) the repayment of principal is spread over a greater number of payments, making each payment smaller.
4
Brad has recently received an interest only loan for $100,000 to operate a food cart in downtown Vancouver. The loan has an interest rate of 8% per annum, compounded monthly, and requires interest only payments every month. How much are the monthly interest only payments that Brad makes if the duration of the loan is two years?
(1) $1,333.33
(2) $666.67
(3) $500.33
(4) $1,200.67
2
j12=8% n=24 pv pmt fv 100,000 ? -100,000 =666.67
Which financial institution is currently the largest single source of institutional mortgage funds in Canada?
(1) Credit unions
(2) Life insurance companies
(3) Trust and loan companies
(4) Chartered banks
4
Calculate the nominal rate of interest, compounded quarterly that is equivalent to 1.5% per quarterly compounding period.
(1) 18%
(2) 6%
(3) 12%
(4) 10%
2
Which of the following is characteristic of a mortgage as an investment?
(1) illiquid relative to government bonds
(2) requires a high degree of administrative work
(3) requires a high initial outlay of capital
(4) all of the above are characteristic of a mortgage as an investment
4
Which one of the following is the BEST reason for an investor to choose to use debt-financing rather than all cash in order to purchase an income-producing property?
(1) The investor can deduct from taxable income the principal portion of debt repayments, thus lowering taxes payable.
(2) A one-year term on the debt financing required is readily available.
(3) The investor can obtain the debt financing at a lower interest rate than the expected yield on the project.
(4) Property values are expected to decrease
3
An interest only loan has an original loan amount of $15,000, carries an interest rate of 6.5% per annum, compounded semi-annually, and has monthly payments of $80.17. When will this loan be completely repaid?
(1) 670 months
(2) 696.44934 months
(3) 300 months
(4) impossible to determine from the information provided
4
How much should an investor be willing to pay for a property that is expected to sell for $55,000 in three years if the investor desires a yield of j2 = 10%?
(1) $40,795.68
(2) $41,041.85
(3) $41,322.31
(4) $47,511.07
2
j2=10% (conert to j1) n=3 pv pmt fv ? 0 55,000 =41,041.85
Mortgage interest rates are sometimes described as being “sticky”; that is, changes in mortgage rates tend to lag behind changes in bond yields. One reason for this “stickiness” is:
(1) the short-term nature of a mortgage loan contract.
(2) the weak secondary mortgage market.
(3) mortgages are a highly liquid investments.
(4) all mortgage investments are identical.
2
A mortgagor would prefer a straight line principal reduction plan to a constant payment plan if:
(1) the mortgagor wishes to delay repayment as long as possible.
(2) the mortgagor foresees his or her income decreasing.
(3) the mortgagor foresees his or her income increasing.
(4) the mortgagor wishes to keep his or her initial payments as low as possible.
2
Calculate the semi-annual periodic rate of interest that is equivalent to 12% per annum, compounded semi- annually.
(1) 1%
(2) 0.975879%
(3) 12%
(4) 6%
4
Which of the following is the main reason that interest accruing loans are normally written for short terms?
(1) For long-terms, borrowers generally prefer to make periodic payments.
(2) Total payments decline over the term of an interest accruing loan, so the sooner the loan is refinanced, the higher the potential return to the lender.
(3) The lender’s return and original investment are at risk for the entire term of an interest accruing loan.
(4) The outstanding balance of an interest accruing loan declines over the term of the loan, so it is prudent for the lender to keep the term short
3
Sue purchased a townhouse in December 2006 for $145,000. In December 2011, it was appraised at
$260,000. In December 2013, Sue sold the townhouse for $190,000. What was the pre-tax yield on her investment expressed as an effective annual rate?
(1) 3.936807%
(2) 8.699947%
(3) 9.388291%
(4) 4.582727%
1
j1= ?
n=7
pv pmt fv
-145,000 0 190,000
=3.94
Carolyn has recently received an interest only loan for $80,000 to operate a food cart in downtown Vancouver. The loan has an interest rate of 9% per annum, compounded quarterly, and requires interest only payments every quarter. Calculate the quarterly interest only payments that Carolyn makes if the duration of the loan is 18 months?
(1) $1,200
(2) $3,600
(3) $1,800
(4) $7,200
3
j4 = 9%
n=6 (18 months dvided by 3)
pv pmt fv
80,000 ? -80,000
=-1,800.00
From the point of view of the lender, the interest charged on a mortgage does NOT represent:
(1) a payment for a portion of the general overhead and operating costs of the lender.
(2) the cost of financing the lender’s debt.
(3) an incentive to accept uncertainty or risk.
(4) a return on capital invested.
2
An investor has decided to establish a bank account in order to accumulate sufficient capital at the end of seven years to purchase a boat. If the account pays interest at 3% per annum, compounded annually and the investor makes deposits of $8,000 at the end of each year, how much capital will he have accumulated at the end of seven years?
(1) $42,851.59
(2) $79,747.81
(3) $57,987.33
(4) $61,299.70
4
j1=3%
n=7
0 -8000 ?
=61,299.70
Two mortgages requiring level blended payments are identical in all respects except that one has a five-year term and the other has a two-year term. The monthly payments on the five-year term mortgage would be:
(1) higher than those required on the two-year term mortgage.
(2) lower than those required on the two-year term mortgage.
(3) the same as those required on the two-year term mortgage.
(4) Monthly payments cannot be compared with the information presented.
3
Which of the following is a reason why an investor would use borrowed funds instead of an all cash offer for a real estate investment.
(1) lack of adequate capital to make the desired investment
(2) to release equity for home improvements
(3) to reduce overall risk by using only part of the borrower’s total funds for any one investment
(4) all of the above
4
An interest accruing mortgage loan requires that $300,000 be paid at the end of a five-year term. If the rate of interest on the loan is j2 = 8%, calculate the amount of funds advanced.
(1) $246,578.13
(2) $202,669.25
(3) $226,965.28
(4) $364,995.87
2
j2=8%
n=5(60)
? 0 300,000
=$202,669.25
