Q&A Hero

Q: According to real option theory, even if construction were instantaneous, it might be optimal not to immediately build a project whose value currently exceeds its construction cost, because: a) There is sufficient probability that the value of the project will rise sufficiently in the future, and building today is mutually exclusive with building in the future. b) There is sufficient probability that the value of the project will fall sufficiently far in the future such that you would lose money if you built it today. c) There is never any reason to exercise a call option before its expiration date. d) The cost of construction can be invested at a rate less than the cap rate (or current cash yield) of the completed project.

Q: Consider the following situation in which the market's expected return to investment in vacant land is 15% per annum:HBU:Today (known)Next Yr. (expected)Value of Completed Built Property$500$540Constr & Dvlpt Cost (exclu land)$400$420NPV (immediate construction)$100$120In the above situation,a) The option premium is due purely to the "growth premium".b) The option premium is due purely to the "irreversibility premium".c) The option premium is due neither to the "growth premium" nor the "irreversibility premium".d) There is no "option premium".

Q: Consider the following situation in which the market's expected return to investment in vacant land is 15% per annum:HBU:Today (known)Next Yr. (expected)Value of Completed Built Property$500$540Constr & Dvlpt Cost (exclu land)$400$420NPV (immediate construction)$100$120In the above situation, which of the following is not true:a) The land is today worth at least $104.b) The optimal strategy is to hold the land undeveloped for now.c) The HBU next year is likely to be a slightly larger or more upscale building than the current HBU today.d) The source of the option premium is uncertainty or volatility regarding future values.

Q: The classical model of land value as a "real option" is what type of option model? a) A finite-maturity European put option. b) A finite-maturity European call option. c) A perpetual American put option. d) A perpetual American call option.

Q: Other things being equal, call option value is greater under all of the following conditions except: a) Longer time until the option expires. b) Greater volatility in the underlying asset value over time. c) Greater current value of the underlying asset. d) Greater exercise price in the option.

Q: The "option premium" is: a) The excess of the option value over its immediate exercise value. b) The risk premium in the required investment return to option investment. c) The excess of the option value over the current value of the underlying asset. d) Difficult to quantify using the Samuelson-McKean Formula.

Q: Alex and Kay are two retail property investment managers hired one year ago by two different investors. In both cases the managers were free to use their own judgment regarding geographical allocation between properties in the East versus West of the country. Kay allocated her capital equally between the two regions, while Alex placed 65% of his capital in the Western region. After one year their respective total returns were as depicted in the table below. As you can see, Kay beat Alex by 60 basis-points in her total portfolio performance for the year.Alex & Kay's returns realized for clients:Weights:AlexKayEast35%50%West65%50%Returns:AlexKayTotal Portfolio6.65%7.25%East6.00%6.50%West7.00%8.00%How would you attribute this 60 basis-point differential between pure allocation performance, pure selection performance, and a combined interaction effect, if you wanted to compute an unconditional performance attribution that was independent of the order of computation? (Note: This is equivalent to taking Alex as the benchmark against which Kay's performance is being compared.)

Q: What is "performance attribution"? How is it used? Describe the three major performance attributes that are typically identified and quantified at the macro-property level.

Q: Describe the implications for asset market efficiency and investment return behavior associated with: (a) Zero autocorrelation in periodic returns series; (b) Positive autocorrelation in periodic returns series; (c) Negative autocorrelation in periodic returns series.

Q: Describe the "non-normal" risk that is not rigorously modeled by modern portfolio theory.

Q: Suppose REIT prices have risen strongly for two consecutive years. It is reasonable to expect: a) REIT prices will certainly rise substantially next year. b) REIT prices will certainly fall substantially next year. c) Property market prices will probably rise in the upcoming year. d) Property market prices will probably fall in the upcoming year.

Q: What is meant by the term "umbrella partnership REIT" (or "UPREIT")? a) A REIT that invests primarily in Seattle. b) A REIT that invests in low-risk properties, saving for a "rainy day". c) A REIT that owns property equity directly. d) A REIT that owns property only indirectly, through its holdings in a partnership.

Q: If an asset has expected return 12%, standard deviation 10%, and T-Bills return is 8%, then its "Sharpe Ratio" is: a) 0 b) 1.200 c) 0.667 d) 0.400

Q: What is the CAPM's basic treatment of idiosyncratic risk? a) It is the most important factor in the model b) It is irrelevant because it can be diversified away c) It is somewhat important, but not as important as systematic risk d) It is a primary indicator of future returns

Q: Which of the following is true about analytical tools useful in "strategic" (long horizon, big picture) and "tactical" (shorter horizon, more specific) investment policy analysis for portfolio management? a) Modern portfolio theory (MPT) is most useful for strategic analysis and equilibrium asset price modeling (such as the CAPM) is most useful for tactical analysis. b) Modern portfolio theory (MPT) is most useful for tactical analysis and equilibrium asset price modeling (such as the CAPM) is most useful for strategic analysis. c) Both models are equally useful at both levels. d) Neither theory is very useful at either level.

Q: According to Portfolio Theory if you do not want to bear much risk: a) Don't invest in risky assets. b) Buy a diversified mixture of risky assets and lever your investment by borrowing. c) Buy a diversified mixture of risky assets and also invest in Government bonds. d) Invest only in efficient markets.

Q: If real estate has an expected return of 10% and stocks have an expected return of 15% then what would be the expected return of a portfolio consisting of 80% real estate and 20% stocks? a) 11% b) 12% c) 13% d) 14%

Q: Suppose you regress a time-series of appraisal-based index periodic returns onto both contemporaneous and lagged securities market returns that do not suffer from lagging or measurement errors. That is, you perform the following regression, where rM,t is the accurate market return in period t and r*t is the appraisal-based real estate return in period t:The resulting contemporaneous and lagged beta values are:What is your best estimate of the true long-run beta between real estate and the securities market index?

Q: Consider two portfolios. Portfolio A has an expected return of 12% and volatility of 11%. Portfolio B has expected return of 9% and volatility of 6%. The interest rate on a riskfree investment is 6% (which can be held either long or short). Which of these two risky portfolios is definitely not on the efficient frontier? (Show your work for full credit.)

Q: Suppose the riskfree rate is 3% and the market risk premium is 6% and a certain asset has a beta of 0.5. The asset in question is expected to produce a perpetuity of net cash flow to its investors equal to $1,000,000 per year. Suppose the CAPM is "true", and disequilibrium in asset market prices does not endure beyond (i.e., "gets corrected" within) one year. Should you buy this asset if you can get it for a current price of $15,000,000? What would be the NPV of such an acquisition, and what would be the minimum expected return on a one-year investment in this asset at that price, and how much of that return (if any) would be considered "super-normal" (i.e., more than what is warranted by the amount of risk in the investment)?

Q: In portfolio theory, what is the definition of an "optimal" portfolio of risky assets if we assume that no such thing as a riskless asset exists? (That is, what are the characteristics that define, or the criteria that determine, such a portfolio?) Now answer this same question under the assumption that there does exist a riskless asset and state how you could identify the optimal portfolio. Be complete, defining any specialized terms you employ.

Q: What is the main value or usefulness of real estate in the portfolio on the asset side of the balance sheet, and what is its main value or usefulness in dealing with the liability side of the balance sheet, for a typical pension fund?

Q: REITs use a metric similar to NOI (for individual properties) of which they must distribute at least 90% as dividends to qualify as a REIT. What is this measure? a) FFO b) FAD c) GAGR d) CPC

Q: Suppose REIT share prices have plunged 25% in the past year. Then it is reasonable to expect: a) REIT prices will certainly rise substantially next year. b) REIT prices will certainly fall substantially next year. c) Unsecuritized property prices will probably rise in the upcoming year. d) Unsecuritized property prices will probably fall in the upcoming year.

Q: REITs don't have to pay corporate income taxes, but in return they face what major restriction? a) They have to hold at least 50% of their assets in government bonds. b) They have to sell any properties they develop within four years of the date of completion of construction. c) Their directors must agree not to accept invitations to spend the night in the White House, except under a Republican administration. d) They have to pay out 90% or more of their annual taxable income in dividends.

Q: Regarding time-series second moments of periodic investment returns data, relevant to portfolio investment analysis: a) An asset's own return variance measures the asset's total risk and its covariance with a portfolio measures its potential contribution to the risk in that portfolio. b) An asset's covariance with the investor's portfolio measures the asset's total risk and its own return variance measures its potential contribution to the risk in that portfolio. c) An asset's own return variance represents the systematic component of risk that cannot be diversified away. d) Investor's should not care about an asset's covariance because it represents the component of risk that cannot be diversified away.

Q: If A and B are two risky assets that are less than perfectly correlated, and P is a portfolio with 1/2 its value in A and 1/2 its value in B, then: a) Volatility of P = (1/2)(Volatility of A) + (1/2)(Volatility of B) b) Volatility of P > (1/2)(Volatility of A) + (1/2)(Volatility of B) c) Volatility of P < (1/2)(Volatility of A) + (1/2)(Volatility of B) d) Volatility of P = (1/4)(Volatility of A)*(Volatility of B)

Q: The traditional "complaint" about applying the CAPM to real estate is: a) Real estate's classical CAPM "beta" with respect to the stock market is nearly zero, yet real estate seems to command a significant ex ante return risk premium. b) Real estate's classical CAPM "beta" with respect to the stock market is very high, yet real estate seems to provide a very low ex post return risk premium. c) Real estate has a moderate "beta" and a moderate ex ante return risk premium, even though it should be a low risk asset class. d) Real estate seems to perform differently than other small cap assets regarding the Fama-French factors.

Q: If the riskfree interest rate is 5%, the market price of risk is 6%, and the beta is 0.5, then, according to the classical single-factor CAPM, what is the equilibrium expected total return for investment in the asset in question? a) 3% b) 6% c) 8% d) 11% e) 17%

Q: In a world where riskless borrowing or lending is possible at 6%, if the expected return to the optimal risky asset portfolio is 12%, and you want a target return of 15%, what must you do? a) Borrow an amount equal to 25% of your wealth and put 125% of your wealth in the risky portfolio. b) Borrow an amount equal to 50% of your wealth and put 150% of your wealth in the risky portfolio. c) Invest half your wealth in the risky portfolio and the other half in bonds. d) Invest 75% of your wealth in risky assets and 25% in bonds.

Q: If the expected return to a risky portfolio is 12% with standard deviation 10%, and if the return to the riskless asset is 7%, then the expected return and Volatility for a portfolio consisting of (1/2) riskless bonds and (1/2) the risky portfolio would be: a) 7% return, 10% Volatility b) 9.5% return, 5% Volatility c) 9.5% return, 10% Volatility d) 10% return, 10% Volatility e) Cannot be computed with the information given.

Q: According to Portfolio Theory all the following statements are true when there is a riskless asset except: a) The optimal risky asset portfolio maximizes the Sharpe Measure. b) The optimal risky asset portfolio minimizes the risk per unit of return risk premium. c) The optimal risky asset portfolio should be bought even by investors who do not want to bear much risk. d) The optimal risky asset portfolio should always be mixed with investments in riskless bonds.

Q: A certain mortgage pool has $800 million in par value. The senior ("A") tranche has 25% credit support, and the next level ("B") has 15% credit support. How much par value of securities was issued in the A tranche? How much par value was issued in the B tranche? How much par value will be lost by each tranche in each of the following scenarios: (a) 10% of the underlying pool par value defaults. (b) 20% of the underlying pool par value defaults. (c) 30% of the underlying pool par value defaults.

Q: Why and how can it be that the more junior CMBS tranches command stated yields that are higher than the expected returns to the underlying property equity that backs the credit of these securities? Why are junior CMBS tranches more risky than whole first mortgages with the same LTV ratios?

Q: In a certain CMBS issue $500 million of senior securities and $100 million of mezzanine securities are issued. The coupon on the senior securities is 7%, and that on the mezzanine is 9%. The average contractual interest rate in the underlying mortgage pool is 10%. Assuming annual interest payments and no par value retired or defaulted, how much residual interest will be available for an IO tranche from these two par-valued tranches at the end of the first year?

Q: Consider the following fully-amortizing 4-year ARM (contract interest rate can change once every 48 months) with 12-year maturity, monthly payments. The ARM has initial interest rate 4% with 1 point, caps are 2% per jump, 6% lifetime, margin is 300 basis points, index is LIBOR currently at 4.5%. Under the "straight line" assumption about future interest rates (i.e., assuming the market rate on the index remains constant), what is the yield to maturity? (Show your work if you want to possibly get partial credit.)

Q: Five years ago you took out a $120,000, 30-year mortgage at 9% interest, with no prepayment penalty. Suppose today you can get 30-year mortgages at 7 percent with 2 points, and you plan to be in your house another five years. What would be the before-tax NPV of refinancing (ignoring transaction costs and option value)?

Q: A lender wants to achieve a 8.5% yield (MEY) on a 30-year amortization, monthly-payment loan with an 8-year maturity with balloon. How many disbursement discount points must the lender charge under the following circumstances: (a) Contract interest rate is 8%; (b) Contract interest rate is 7.5%.

Q: Consider a $5,000,000, 8.5%, 30-year mortgage with monthly payments. What is the YTM of this loan under the following circumstances: (a) No points, fully-amortizing; (b) Three points of disbursement discount, fully amortizing; (c) Three points of disbursement discount, 7-year maturity with balloon.

Q: Consider a $4,000,000, 7%, 25-year mortgage with monthly payments and a 7-year maturity with balloon. If the market yield is 7.5% (BEY), how many disbursement discount points must the lender charge to avoid doing a negative NPV deal from a market value perspective?

Q: Consider the following fully-amortizing 5-year ARM (contract interest rate can change once every 60 months) with 15-year maturity, monthly payments. The ARM has initial interest rate 6.5% with 2 points, caps are 2% per jump, 5% lifetime, margin is 300 basis points, index is Treasury Bonds that are currently yielding 6.0%. The loan amount is $100,000. Under the "straight line" assumption about future interest rates (i.e., assuming the market rate on the index remains constant), what is the yield to maturity? (Show your work if you want to possibly get partial credit.)

Q: What is the present value at a 10% discount rate (expected return) of a non-recourse mortgage that has a single payment remaining, due one year from now, in the amount of $1,000,000. Assume that the borrower will threaten a "strategic default" if it is in his interests to do so, and that the borrower has "full bargaining power" (can make the lender pay all the foreclosure 3rd party costs). The foreclosure costs are $200,000, and the possible future value scenarios one year from now for the property securing the mortgage (with probabilities) are:(i) $1,500,000 (80% probability)(ii) $1,150,000 (10% probability)(iii) $900,000 (10% probability)

Q: Consider the following 5-year ARM (contract interest rate can change once every 60 months) with 15-year maturity, monthly payments. The ARM has initial interest rate 6.5% with 2 points, caps are 2% per jump, 5% lifetime, margin is 300 basis points, index is Treasury Bonds that are currently yielding 6.0%. The loan amount is $100,000. Under the "straight line" assumption about future interest rates (i.e., assuming the market rate on the index remains constant), what is the reported yield to maturity ("APR", rounded to nearest 1/8 point)?

Q: Suppose the 9%, $120,000, 30-year, monthly-payment CPM loan has 2 "points" of prepaid interest up front, plus a 5 point prepayment penalty (percent of OLB). What would be the yield (in nominal per annum terms) over an expected holding period of 7 years (i.e., expected prepayment 7 years after loan is originated)?

Q: What is the difference between the contract (or stated) yield and the realistic expected return (ex ante) on a mortgage? Why is this difference important?

Q: Consider a two-year mortgage with annual payments in arrears. Suppose the probability of default is 3% in the first year and 6% in the second year if the loan survives to the second year. (a) What is the hazard function of this loan? (b) What is the cumulative (or lifetime) default probability in this loan as of the time of its origination?

Q: Which of the following is true when the yield curve is steeply rising: a) ARM interest rates will be about the same as FRM interest rates. b) Borrowers can "lock in" the low short-term interest rates by taking out an ARM. c) If you borrow using an ARM, your interest rates are more likely to rise than fall in the future. d) FRM interest rates will be lower than ARM rates, due to the Federal Reserve Board's efforts to stimulate the economy by reducing interest rates.

Q: For the situation described in the problem above (i.e., where the BEY is 9.0%), what is the "mortgage equivalent" yield, or the "nominal" annual rate (ENAR) with monthly payments on the loan? a) 0.75% b) 8.84% c) 9.00% d) 9.38% e) 10.57%

Q: Suppose the market yield on mortgages is 9.0% in bond equivalent terms (BEY, or "coupon equivalent", CEY). What is the effective yield (EAY or EAR)? a) 0.75% b) 4.5% c) 9.0% d) 9.20% e) 9.38%

Q: How much is the previous mortgage worth in the secondary market if the prevailing YTM in that market is 7.75%? (Assume the loan is held to maturity.) a) $78,000. b) $80,000. c) $81,510. d) $107,064.

Q: In the mortgage in the previous question, what is the "effective interest rate" or yield over the borrower's expected holding period if the borrower expects to hold the loan for 12 years? a) 8.00% b) 8.25% c) 8.31% d) 8.56%

Q: Consider a 20-year (monthly-payment), 8%, $80,000 mortgage with 2 points prepaid interest up front. What is the yield to maturity? a) 8.00% b) 8.12% c) 8.20% d) 8.27%

Q: In a mortgage, an "exculpatory clause" typically is used to: a) Exclude a portion of the property from the collateral securing the loan. b) Prevent the lender from having recourse to the borrower, other than taking the collateral property. c) Prevent the borrower from getting out of loan obligations by declaring bankruptcy. d) Exclude the lender from culpability in the event the property owner is sued for damages by a user of the property.

Q: If a mortgage has a "Due-on-Sale" clause, the borrower would not be able to: a) Take out a home equity loan. b) Take out a car loan. c) Pay the loan off prior to selling the house. d) Allow a subsequent buyer of the property to assume (take over) the mortgage.

Q: For the same property as above, suppose the underwriting criteria is a maximum loan/value ratio (LTV) of 75%, and we estimate property value by direct capitalization using a rate of 11% on the stated NOI. By this criterion what is the maximum loan amount? a) $2,789,406 b) $3,409,091 c) $3,844,614 d) $4,000,000 e) $4,139,619

Q: Consider an 8.5% loan amortizing at a 25-year rate with monthly payments. What is the maximum amount that can be loaned on a property whose net operating income (NOI) is $500,000 per year, if the underwriting criteria specify a debt service coverage ratio (DCR) no less than 125%? a) $2,789,406 b) $3,409,091 c) $3,844,614 d) $4,000,000 e) $4,139,619.

Q: (a) Consider a $1,000,000, 12%, 20-year mortgage with monthly payments. Compute the first payment, the interest and amortization, and the loan balance after the first loan payment, for each of the following loan types: (a) Interest-only, (b) Constant-amortization (CAM), and (c) Constant-payment (CPM). (All you need to do is fill in the table below.)

Q: Consider a $5,000,000, 9%, CPM with monthly payments. What is the regular monthly payment and the balloon payment amounts in each of the following cases:(a) Fully-amortizing, 30-year loan; (b) 30-year amortization, 10-year balloon; (c) 15-year amortization, 10-year balloon. (d) What is the major disadvantage, and advantage, of the 15-year amortization-rate 10-year loan in (c) as compared to the 30-year amortization-rate 10-year loan in (b)?

Q: (a) As a borrower, which of the following two 30-year, monthly-payment loans would you choose (and why) if you had a 10-year expected prepayment horizon: 5% interest rate with 3.5 points, versus 5.875% interest with one point? (b) Suppose your prepayment horizon was 5 years? You must show your work in both cases.

Q: Answer the following questions.a) What are the monthly payments for a 30-year, 9.00%, fully-amortizing mortgage with initial contract principal of $120,000?b) What is the outstanding loan balance after 12 years on the above 30-year, 9.00%, $120,000 loan with monthly payments?c) What is the amount of principal paid down and the amount of interest in the first payment in the above mortgage?d) If the above mortgage were a constant-amortization mortgage (CAM) instead of a constant-payment mortgage (CPM), what would be the first month's payment due on the loan?

Q: In a one-period world, if the conditional yield degradation is 20%, the unconditional default probability is 10%, and the lender wants an expected return of 5%, what contract yield must the loan carry?

Q: What is the main factor which can cause the Weighted Average Maturity of the A tranch of a CMBS issue to be lower (shorter) than lower tranches? a) Superior credit quality b) Prepayment of loans c) More "weight" attributed to higher quality financial issues d) Less demand from non-institutional investors

Q: A building that is worth $5 Million has a first mortgage on it with $4 Million owed, a second mortgage with $2 Million owed, and a third mortgage with $1 Million owed. Which describes the distribution of the $5 Million proceeds from the foreclosure sale? a) $5 Million to the first mortgage lender, and none to anyone else. b) $4 Million to the first mortgage lender, $1 Million to the second mortgage lender, and none to the third. c) $2,857,143 to the First mortgage lender, $1,428,571 to the second mortgage lender, and $714,286 to the third mortgage lender. d) $1,666,667 to each lender.

Q: An acceleration clause: a) Allows the borrower to pay the loan off early. b) Allows the borrower to reduce the principal balance at a faster rate. c) Allows the borrower to make subsequent draw-downs of the agreed upon principal. d) Allows the lender to make the full outstanding balance due immediately.

Q: The two legal documents which constitute a mortgage loan include: a) The Mortgage Deed and the Deed of Trust. b) The Mortgage Deed and the Certificate of Title. c) The Promissory Note and the Certificate of Title. d) The Promissory Note and the Mortgage Deed.

Q: In comparing an adjustable rate mortgage (ARM) with a fixed rate mortgage (FRM): a) Boththe borrower and lender bear moreinterest rate risk with the ARM than with the FRM. b) Boththe borrower and the lender bear lessinterest rate risk with the ARM than with the FRM. c) The ARM borrowerbears moreinterest rate risk, but the ARM lenderbears lessinterest rate risk, than with the FRM. d) The ARM borrowerbears lessinterest rate risk, but the ARM lenderbears moreinterest rate risk, than with the FRM.

Q: For the same property as above, suppose the underwriting criteria is a maximum loan/value ratio (LTV) of 80%, and we estimate property value by direct capitalization using a rate of 8% on the stated NOI. By this criterion what is the maximum loan amount? a) $8,000,000 b) $9,000,000 c) $10,000,000 d) $11,000,000

Q: Consider a 7% loan amortizing at a 30-year rate with monthly payments. What is the maximum amount that can be loaned on a property whose net operating income (NOI) is $1,000,000 per year, if the underwriting criteria specify a debt service coverage ratio (DCR) no less than 120%? a) $9,652,066. b) $10,438,026. c) $12,525,631. d) $15,030,757.

Q: A graduated payment mortgage (GPM) would be most appropriate in all of the following circumstances except: a) A young homebuyer whose income is expected to grow in real terms. b) An inflationary environment where rents are likely to grow in nominal terms. c) A declining neighborhood where property values are likely to decline. d) A distressed property purchased by an investor who plans turn-around improvements.

Q: In the ARM above, what will be the contract interest rate after the end of the first adjustment interval if the index remains at 5.50%? a) 5.50% b) 7.00% c) 7.50% d) 9.00%

Q: An adjustable rate mortgage is offered with an initial interest rate of 7.00%. The index is currently yielding 5.50%, and the margin is 200 basis points. What is the size of the "teaser"? a) There is no teaser. b) 50 basis points. c) 150 basis points. d) 350 basis points.

Q: If the market's required risk premium on the return to equity is 6% with a 50% loan/value ratio, what is the required equity risk premium with a 70% loan/value ratio? (Assume riskless debt at either L/V ratio.)

Q: Use the following information and the APV decision rule, to answer the following questions. A seller has offered you a $1,500,000 interest only 7 year loan at 6% (annual payments), when market interest rates on such loans are 7%. You face a 35% marginal income tax rate.a) Basing your decision on market values, how much more should you be willing to pay for the property than you otherwise think it is worth, due to the financing offer?b) Answer the same question only now basing your answer on investment value rather than market value.

Q: A non-residential commercial property which cost $500,000 is considered to have 30 percent of its total value attributable to land. What is the annual depreciation expense chargeable against taxable income?

Q: (a) Assuming riskless debt, if the loan/value ratio is 75%, approximately how much more risk will there be in the equity return than if the loan/value ratio were 50%? Put another way: If the return to equity can vary per year within a range of 15% with a 50% loan/value ratio, then within what range can it vary with an 75% loan/value ratio? (b) How much larger should the market's required risk premium be in the required return to equity with 75% debt as compared to 50% debt?

Q: The Donald Grump Corporation, a publicly-traded REIT, has expected total return to equity of 13%, average interest rate on their debt of 7.5%, and a Debt/Total Asset Value ratio of 40%. What is Grump's (firm-level) average cost of capital?

Q: The difference between the net operating income (NOI) and the equity before-tax cash flow (EBTCF) is: a) Property Tax Expense and capital expenditures. b) The debt service and capital expenditures. c) Property taxes and income taxes. d) Interest expense and depreciation expense.

Q: Suppose a property has a cap rate of 10% and you can borrow at a mortgage constant of 11%. If you borrow 75% of the property price, what will be your equity yield? a) 7.00% b) 8.25% c) 10.00% d) 11.00% e) Cannot be determined from the information given.

Q: The "Leverage Ratio" equals: a) The Loan Value divided by the Property Value. b) The Property Value divided by the Loan Value. c) The Owner's Share Value divided by the Property Value. d) The Property Value divided by the Owner's Share Value.

Q: An investor believes that a certain property is worth $10,000,000. The seller refuses to sell it for that amount, but has offered to provide a 5-year interest-only loan for $5,000,000 at 4% interest (annual payments at the ends of the years, first payment due in one year). Market interest rates on such a loan are currently 6.5%. How much should the investor be willing to pay for the property from an investment value perspective (taking the loan deal) if the investor faces a 30% marginal income tax rate? a) $10,000,000 b) $10,383,588 c) $10,403,023 d) $10,519,460 e) Insufficient information to answer the question.