Advanced Real Estate Finance
Textbook Exam Questions
Course Introduction
Advanced Real Estate Finance delves into the complex mechanisms of real estate capital markets, focusing on sophisticated financial instruments, risk assessment, and investment analysis. The course covers topics such as mortgage structuring, securitization, real estate investment trusts (REITs), portfolio management, and equity/debt financing strategies. Students will analyze case studies on commercial property transactions, explore the impact of economic cycles on real estate values, and utilize quantitative models to evaluate deal feasibility and performance. Emphasis is placed on strategic decision-making, applying financial theory to real-world property investments, and understanding regulatory frameworks influencing advanced real estate finance.
Recommended Textbook
Real Estate Finance Theory and Practice 6th Edition by
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22 Chapters
473 Verified Questions
473 Flashcards
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Terrence M. Clauretie
Page 2
Chapter 1: Finance and Real Estate
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Sample Questions
Q1) Capital markets:
A) deal in long-term securities
B) deal in short-term Treasury bills and long-term Treasury bonds to finance their deficits
C) rarely are involved in real estate transactions
D) consider mortgages only for short-term,interim financing
Answer: A
Q2) Risk:
A) is the same as risk-return tradeoff
B) is the possibility that the actual result will differ from the expected outcome
C) states that investors require additional expected returns for taking on additional risk
D) doesn't need to be considered when analyzing a potential investment
Answer: B
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3
Chapter 2: Money Credit and the Determination of Interest
Rates
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Sample Questions
Q1) The price of a bond:
A) is related to nothing. It is arbitrarily set by the corporation's Treasurer and Board of Director based on their need for profit the day the bonds are issued.
B) is inversely related to the market-required yield
C) in not a reflection of the market as a whole
D) increases (higher yields)and leads to an increase in the quantity demanded
Answer: B
Q2) In the absence of inflationary expectation,the _________________________ would equal the real rate.
A) callability risk rate
B) purchasing power risk rate
C) yield curve rate
D) risk-free rate
Answer: D
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Chapter 3: Finance Theory and Real Estate
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Sample Questions
Q1) A call option is:
A) the obligation to purchase an asset at the strike price before the exercise date
B) the right to sell an asset at the purchase price before the exercise date
C) the right to purchase an asset at the strike price on or before the exercise date
D) the obligation to sell an asset at the strike price before the exercise date
Answer: C
Q2) The discounted cash flow (DCF)model of valuation does NOT contain:
A) present value
B) internal rate of return
C) the discount rate
D) amount of the cash flows
Answer: B
Q3) For commercial property,a larger down payment is often required; this:
A) increases the value of the put option
B) increases the value of the call option
C) reduces the value of the call option
D) reduces the value of the put option
Answer: D
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5
Chapter 4: The Early History of Residential Finance and
Creation of the Fixed Rate Mortgage
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Sample Questions
Q1) Suppose your FRM monthly payment is $1048.82 with terms of 7.5% for 30 years.How much did you originally borrow?
A) $377,575
B) $150,000
C) $376,575
D) $1,413,228
E) cannot be determined
Q2) The Truth-in-Lending law:
A) requires the lender disclose the APR on a mortgage loan
B) requires the lender disclose the total finance charges on a mortgage loan
C) provides for penalties for failure to accurately disclose the APR
D) all of the above
Q3) A prepayment penalty in a mortgage has the effect of ________ the APR.
A) increasing
B) decreasing C) doesn't affect
D) cannot determine the effect
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Page 6
Chapter 5: Modern Residential Finance
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Sample Questions
Q1) Negative amortization refers to the fact that:
A) the balance of a loan grows larger rather than smaller
B) the amount of interest on a loan becomes larger rather than smaller
C) the reduction in the value of a property falls below the loan amount
D) none of the above
Q2) Assumable loans and carry backs:
A) have totally replaced FHA and VA financing
B) are examples of what is termed creative financing
C) are short-term loans with balloon payments
D) are two forms of FHA financing
Q3) Disintermediation refers to:
A) the withdrawal of funds from financial institutions by depositors in excess of deposits
B) financial institutions withdrawing from the Federal Reserve System
C) financial institutions shifting from FHA loans to conventional loans
D) none of the above
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Chapter 6: Alternative Mortgage Instruments
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Sample Questions
Q1) The tilt problem causes the real payment on a fixed rate mortgage to be:
A) high at the beginning and low at the end
B) low at the beginning and high at the end
C) high at the beginning and end and low in the middle d low at the beginning and end and high in the middle
Q2) An ARM with 2/6 interest rate caps and a 2.75 margin has a current contract rate of 9%. It's adjustment time and the index value is 4%.The next year's contract rate is:
A) 4%
B) 6%
C) 6.75%
D) 7%
E) cannot be determined
Q3) The following is NOT true of a Shared Appreciation Mortgage:
A) there are annual adjustments to the contract rate
B) there is the risk that property values may not increase as fast as general inflation
C) the borrower may not have an incentive to maintain the property d . the contract rate is generally lower than on a standard fixed rate loan
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Chapter 7: Financing and Property Values
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Sample Questions
Q1) The term "cash equivalent" value refers to:
A) the value of a residential property while it is listed
B) the amount of discount points charged by a lender
C) the value of a property if sold for all cash
D) the cash equivalency of the mortgage on a property
Q2) Mortgage Revenue Bonds,a class of bonds called municipals,are issued by state and local governments and:
A) allow the government to purchase property for government use
B) provide an interest rate at a higher rate than corporate bonds
C) provide interest that is free of federal taxation
D) provide interest that is free from capital gains taxation
Q3) The term "carryback financing" refers to:
A) a motivated seller who takes back a note at a low rate in order to sell the property
B) a situation where the lender takes the property back after a default on the loan
C) an assumable loan in which a lender waives the discount points in order to complete the loan transaction
D) an assumable FHA loan
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9
Chapter 8: Federal Housing Policies: Part 1
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Sample Questions
Q1) A loan in which the payments go up or down with movements in the index,is called a(n):
A) adjustable rate mortgage
B) graduated payment mortgage
C) buy down mortgage
D) shared appreciation mortgage
Q2) A loan in which the seller or another third party agrees to pay an amount to the lender in order to reduce the borrower's payments,or to reduce the interest rate for a portion of the loan's term,is called a(n):
A) adjustable rate mortgage
B) graduated payment mortgage
C) buy down mortgage
D) shared appreciation mortgage
Q3) A loan in which the lender receives a share of the increase in value of the property in return for a reduction in the initial rate of interest,is called a(n):
A) adjustable rate mortgage
B) graduated payment mortgage
C) buy down mortgage
D) shared appreciation mortgage
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Page 10
Chapter 9: Federal Housing Policies: Part 2
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Sample Questions
Q1) The term "economics of information" refers to a theory that proposes that:
A) minority group members are usually not informed of all of their fights as a borrower,and are therefore not allowed to take advantage of economic opportunities available to others
B) often the expense of acquiring information is greater than the benefits. In such a case,discrimination may occur
C) firms with the best information about their borrowers are almost always more successful. But,it may be illegal to ask borrowers to supply that information or to base the loan decision upon that information
D) discriminatory firms generally have to spend more to ensure that their records comply with the strict letter of the regulations
Q2) The practice of designating an area in which a lender will not make a conventional mortgage loan is known as:
A) redlining
B) blockbusting
C) FHAing
D) zoning
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Chapter 10: The Secondary Mortgage Market
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Sample Questions
Q1) 10-33.Grantor trusts were developed for use with:
A) mortgage backed bonds
B) pay-through bonds
C) pass-through bonds
D) none of the above
Q2) 10-40.Desirable characteristics of mortgage-related securities include:
A) credit enhancement
B) rearrangement of cash flows to meet demands of investors
C) avoiding double taxation
D) a and b
E) all of above
Q3) 10-20.Valuing mortgages on a frequent basis as a result of the changes in interest rates is referred to as:
A) tailor
B) mark-to-market
C) tranches
D) SWAPs
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Chapter 11: Valuation of Mortgage Securities
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Sample Questions
Q1) 11-24.Payments of principal from a pool of mortgages in excess of scheduled amortization is referred to as:
A) prepayment
B) yield-to-maturity payments
C) valuation
D) negative duration
Q2) Which is true?
A) the value of a pass-through is the sum of the component IO and PO
B) if interest rates rise above the coupon rate prepayment will accelerate
C) the acceleration of prepayment will reduce the value of the PO
D) the increase in market rates reduces the discount rate used to value the PO cash flows
Q3) 11-22.An increase in the market rate of interest will:
A) slow the prepayment rate on discounted passthroughs
B) slow the prepayment rate on premium passthroughs
C) both a and b
D) will not affect either a or b because of the price compression theory
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13
Chapter 12: Controlling Default Risk Through Borrower
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Sample Questions
Q1) 12-20.A theory that states that no borrower with substantial positive equity would default,even if unable to make the monthly payments,is:
A) equity theory
B) bird-in-hand theory
C) resolution equity theory
D) equity binding theory
Q2) 12-37.An individual other than the borrower that assures the payment of a note is a:
A) dispensator
B) executor
C) vindicator
D) guarantor
Q3) 12-31.A Federal agency that requires a 10 percent down payment in order to purchase adjustable rate mortgages (ARMs)with negative amortization is:
A) FNMA
B) FHLMC
C) HUD
D) both a and b
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Chapter 13: Loan Origination, Processing, and Closing
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Sample Questions
Q1) 13-28.Which of the following is NOT a step in the cost approach to appraising?
A) estimate the net operating income as completed
B) estimate the value of the land as vacant
C) estimate the cost of replacing the structure d estimate the depreciation on current structure
Q2) Flood insurance is required for properties located in:
A) zone A
B) zone B
C) zone C
D) zone D
Q3) 13-33.A promissory note represents:
A) the borrower's promise to obtain a loan
B) the borrower's promise to repay a loan
C) a deed
D) the lender's promise to make a loan
Q4) 13-32.For FHA loans a lender can do virtually all of the underwriting under the:
A) verification of indebtedness program
B) loan processing program
C) direct endorsement program
D) mortgage banking program
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Chapter
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Sample Questions
Q1) A deficiency judgment is:
A) a judgment that allows the mortgagor to redeem the property prior to foreclosure
B) a judgment against the borrower for the difference between the amount owed to a lender and the value of the property sold at a foreclosure sale
C) a judgment that allows the mortgage insurer to pursue the lender for losses in a foreclosure
D) none of the above
Q2) Title insurance:
A) insures against losses on a property due to natural disasters
B) insures against losses due government restrictions on the use of the property
C) insures against losses due to changes in interest rates
D) none of the above
Q3) Foreclosure is a process that:
A) returns the property to a borrower when the loan is paid off
B) is consistent in all states as required by federal law
C) is exercised by a buyer of the property
D) none of the above
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Page 16
Chapter 15: Value, Leverage, and Capital Structure
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Sample Questions
Q1) Investors purchase multiple properties to:
A) diversify a portfolio
B) maximize investment return
C) minimize risk
D) a and b
E) all of the above
Q2) 15-10.Residential income property is depreciated over:
A) 15 years
B) 30 years
C) 39 years
D) 27.5 years
E) 20 years
Q3) A key non-real estate source of property cash flow is:
A) tax shelter
B) managerial talent
C) use of equity financing
D) debt financing
E) all the above
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17
Chapter 16: Federal Taxation and Real Estate Finance
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Sample Questions
Q1) 16-11."Boot" refers to:
A) cash
B) non-like-kind property
C) relief of debt
D) all of the above
E) a and c
Q2) For a real estate partnership investment the "at-risk" amount is:
A) the investor's cash contribution
B) tax basis of any property contributed
C) non-recourse debt borrowed from the partnership
D) a plus b plus c
E) a plus b
Q3) 16-17.Presently the tax laws that favor investment in real estate include those related to:
A) passive loss limitation
B) depreciation write-off
C) low income housing
D) capital gains
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18
Chapter 17: Sources of Funds for Commercial Real Estate
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Sample Questions
Q1) Insurance companies invest primarily in:
A) CMOs
B) commercial mortgages
C) residential mortgages
D) none of the above
Q2) The largest supplier of commercial real estate debt is:
A) state and local retirement funds
B) commercial banks
C) thrifts
D) pension funds
Q3) Thrifts specialize in:
A) residential loans
B) multi-family properties
C) commercial properties
D) none of the above
Q4) The primary institutional investors in equity real estate are:
A) pension funds
B) federal credit agencies
C) unions
D) none of the above
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Chapter 18: Acquisition, Development, and Construction Financing
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Sample Questions
Q1) 18-21.An independent third party that is a specialist in monitoring the disbursement of the loan to the proper contractors is a:
A) construction loan administrator
B) construction loan processor
C) voucher control agent
D) institutional lender
Q2) Rolling options are popular with:
A) speculators
B) residential developers
C) lenders
D) commercial developers
Q3) 18-46.When improvements in the infrastructure are financed by additional property taxes applied to properties in the geographical area of the development it is termed:
A) density bonus
B) tax-increment financing
C) senior financing
D) partial release provision
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Page 20
Chapter 19: Permanent Financing of Commercial Real
Estate Properties
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Sample Questions
Q1) An equity participating loan is when:
A) the lender has a claim to a portion of the income if it exceeds a residual amount
B) the lender shares in the income or cash flows from the property
C) a tradeoff between the owner/borrower and the lender occurs
D) all of the above
Q2) 19-18.If an owner sells a property under a sale-leaseback agreement he or she may be required to continue to show the property on:
A) the balance sheet as a liability
B) the income statement as an expense
C) the balance sheet as an asset
D) the income statement as a revenue
Q3) Between residential and commercial loans the following is NOT true:
A) long-term commercial loans involve a more intricate underwriting process
B) residential loans have prepayment penalties,commercial loans do not
C) a clause in a residential loan allows the lender to step in and collect lease payments directly from the tenants in the event the borrower defaults on the loan
D) b and c
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Page 21
Chapter 20: Ownership Structures for Financing and Holding Real Estate
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Sample Questions
Q1) The main determinants of the form of ownership for real estate are:
A) income tax laws
B) issues of liability
C) access to capital markets
D) a and b
E) all of above
Q2) 20-12.REITs that invest in both equity properties and mortgages are called:
A) combination REITs
B) hybrid REITs
C) dual purpose REITs
D) none of the above
Q3) In 1960 Congress created the REIT structure to:
A) eliminate double taxation problems
B) eliminate personal liability issues
C) increase holding periods
D) offset passive loss limitation problems
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Page 22
Chapter 21: Real Estate in a Portfolio Context
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Sample Questions
Q1) 21-16.The major risks associated with investment in real estate include:
A) marketability risk
B) information risk
C) residual risk
D) none of the above
E) all of above
Q2) 21-15.The "smoothing" of real estate asset returns estimated from appraised values refers to:
A) appraised property values do not fluctuate as much as transaction values
B) appraised values is based only on previously appraised values
C) appraised values are never made with reference to transaction values on comparables
D) none of the above
Q3) A statistical measure of risk is termed:
A) correlation coefficient
B) probability
C) variance d none of the above
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23
Chapter 22: Liability, Agency Problems, Fraud, and Ethics in Real Estate Finance
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Q1) One who intentionally causes injury to another is subject to liability to the other for that injury,if this conduct is generally culpable and not justifiable under the circumstances.This is referred to as:
A) prima facia tort
B) breach of contract
C) fraud
D) strict liability
Q2) The law excludes from the category of an owner or operator "a person,who,without participating in the management of a vessel or facility,holds an indicia of ownership primarily to protect his security interest in the vessel or facility." This is termed:
A) secured-lender exemption
B) strict liability
C) potentially responsible parties
D) joint and several liability
Q3) Making of a promise with no intention of fulfilling it is referred to as:
A) nondisclosure fraud
B) promissory fraud
C) tort
D) fiduciary
24
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