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Q:
Which of the following descriptions most accurately reflects the risk position of an ARM lender in comparison to that of a FRM lender?
Interest Rate Risk Default Risk
(A) Higher Higher
(B) Lower Lower
(C) Higher Lower
(D) Lower Higher
Q:
Which is NOT a component of an ARM?
(A) A margin
(B) An index
(C) A chapter
(D) Caps
Q:
Which of the following statements regarding negative amortization in the previous question is true?
(a) The Year3 payments are less than the interest assessed on the loan, so the outstanding balance at the end of Year3 is higher than at the end of Year2.
(b) The Year3 payments are more than the interest assessed on the loan, so the outstanding balance at the end of Year3 is higher than at the end of Year2.
(c) The Year3 payments are less than the interest assessed on the loan, so the outstanding balance at the end of Year3 is lower than at the end of Year2.
(d) The Year3 payments are more than the interest assessed on the loan, so the outstanding balance at the end of Year3 is lower than at the end of Year2.
Q:
Assume that the loan in the previous question allowed for negative amortization. What would be the outstanding balance on the loan at the end of Year3?
(a) $190,074
(b) $192,337
(c) $192,812
(d) $192,926
Q:
A borrower takes out a 30-year adjustable rate mortgage loan for $200,000 with monthly payments. The first two years of the loan have a "teaser" rate of 4%, after that, the rate can reset with a 5% annual payment cap. On the reset date, the composite rate is 6%. What would the Year3 monthly payment be?
(a) $955
(b) $1,067
(c) $1,003
(d) $1,186
(e) Because of the payment cap, the payment would not change.
Q:
A borrower takes out a 30-year adjustable rate mortgage loan for $200,000 with monthly payments. The first two years of the loan have a "teaser" rate of 4%, after that, the rate can reset with a 2% annual rate cap. On the reset date, the composite rate is 5%. What would the Year3 monthly payment be?
(a) $955
(b) $1,067
(c) $1,071
(d) $1,186
(e) Because of the rate cap, the payment would not change.
Q:
The default risk of a FRM is higher than the default risk of an ARM.
Q:
ARMs eliminate all the lender's interest rate risk.
Q:
The floor of an ARM is the maximum reduction of payments or interest rates allowed.
Q:
Negative amortization reduces the principal balance of a loan.
Q:
Lender's can partially avoid estimating interest rates by tying an ARM to an interest rate index.
Q:
PLAMs have been very popular with lenders.
Q:
A major benefit of a PLAM is the mortgage payment increases closely following borrower salary increases.
Q:
Characteristics of a PLAM include an increasing mortgage payment and an adjusting loan balance tied to an index.
Q:
ARMs help lenders combat unanticipated inflation changes, interest rate changes, and a maturity gap.
Q:
ARMs were developed because lenders were tired of offering a limited selection of loan alternatives to borrowers.
Q:
Which one of the following is TRUE about Prepayment penalties:
(A) They are never used with residential mortgages
(B) They lower the effective cost if the loan is repaid before maturity
(C) They are equivalent to charging additional points for the loan
(D) They are not included in the APR calculation
Q:
Assuming all APRs equal, the effective interest rate on a loan is highest when:
(A) The loan has no points and a 30 year maturity and is prepaid in five years
(B) The loan has no points and is prepaid at maturity
(C) Points are charged and the loan is paid off at maturity in 30 years
(D) Points are charged and the loan has a 30 year maturity but prepaid in five years
Q:
APR stands for which of the following?
(A) Annual percentage rate
(B) Amortized percentage regulator
(C) Accrued percentage rate
(D) Annual percentage regulator
Q:
Points are also known as:
(A) Third party charges
(B) Reduction in payment amount
(C) Loan discount fees
(D) Reduction of mortgage yield
Q:
Demand for a mortgage loan is considered:
(A) Stable demand
(B) Derived demand
(C) Interest rate demand
(D) Nominal demand
Q:
Because its payment stream looks like a staircase, which loan is sometimes referred to as "stepped-up" financing due to prearranged payment increases?
(A) CAM
(B) CPM
(C) GPM
(D) ARM
Q:
Over the life of the loan, which of the following loans would continually have a lower principal balance given each loan had the same term, principal amount, and average interest rate?
(A) CAM
(B) CPM
(C) GPM
(D) Cannot be determined with this information
Q:
Which mortgage would a borrower prefer to have during inflationary and recessionary periods?Inflationary Recessionary(A) CPM GPM(B) GPM CAM(C) CPM CAM(D) CPM GPM
Q:
Which of the following closing costs do not increase the lender's effective loan yield?
(A) Discount points
(B) Prepayment penalties
(C) Title insurance charges
(D) Origination fees
Q:
At the end of five years, calculating the loan balance of a constant payment mortgage is simply the:
(A) Present value of a single amount
(B) Future value of a single amount
(C) Present value of an ordinary annuity
(D) Future value of an ordinary annuity
Q:
In comparison to the first month's payment of a CAM, the first month's payment of a CPM:
(A) Is higher
(B) Is lower
(C) Is the same
(D) Cannot be determined with this information
Q:
One of the most popular amortizing mortgages today is the constant payment mortgage. Which of the following characterizes the components of the CPM payment over the life of the loan?Interest Amortization Payment(A) Decreasing Decreasing Decreasing(B) Increasing Decreasing Constant(C) Decreasing Increasing Constant(D) Constant Constant Constant
Q:
One of the first amortizing mortgages was the constant amortization mortgage. Which of the following characterized the components of the CAM payment over the life of the loan?Interest Amortization Payment(A) Decreasing Decreasing Decreasing(B) Constant Decreasing Decreasing(C) Decreasing Constant Decreasing(D) Constant Constant Constant
Q:
Risk is an important component of interest rates. Which of the following risks is NOT a determinant of interest rates?
(A) Default risks
(B) Interest rate risks
(C) Institutional risks
(D) Marketability risks
Q:
Which of the following is NOT a determinant of interest rates for single family residential mortgages?
(A) The demand and supply of mortgage funds
(B) Inflation expectations
(C) Liquidity
(D) The demand and supply of apartments
Q:
A borrower obtains a $150,000 reverse mortgage with monthly payments over 10 years. If the interest rate of the mortgage loan is 8%, what is the monthly payment received by the borrower?
(a) $820
(b) $863
(c) $1,250
(d) $1,820
Q:
A borrower takes out a 30-year mortgage loan for $100,000 with an interest rate of 6% plus 4 points. What is the effective annual interest rate on the loan if the loan is carried for all 30 years?
(a) 5.6%
(b) 6.0%
(c) 6.4%
(d) 6.6%
Q:
A borrower has a 30-year mortgage loan for $200,000 with an interest rate of 6% and monthly payments. If she wants to pay off the loan after 8 years, what would be the outstanding balance on the loan?
(a) $84,886
(b) $91,246
(c) $146,667
(d) $175,545
(e) Not enough information
Q:
With a reverse mortgage the borrower receives payments from the bank.
Q:
The APR for a loan assumes it is prepaid after ten years.
Q:
Borrowers with fixed rate mortgages generally benefit if actual inflation is higher than expected inflation.
Q:
Graduated payment mortgage are loans available to people who have graduated from college.
Q:
Origination fees are tax deductible as an interest expense.
Q:
Prepayment penalties increase the lender's mortgage yield and discount points decrease it.
Q:
The annual percentage rate, disclosed at the loan closing, closely approximates the borrower's true cost of funds.
Q:
Truth-in-lending requires the borrower to tell the truth on the loan application.
Q:
With every CPM, the effective costs of borrowing are higher than the stated rate of the loan.
Q:
Determining a loan balance on a CPM is a simple future value of an annuity problem.
Q:
One difference between the constant amortizing mortgage (CAM) and the constant payment mortgage (CPM) is the interest paid and loan amortization relationship. With a CAM, the loan amortization and interest paid are directly related and with the CPM the loan amortization and the interest paid are inversely related.
Q:
Lenders and investors worry about default, interest rate, marketability, and liquidity risks.
Q:
Inflation makes very little difference to lenders of and investors needing money.
Q:
Present Value Factor for Reversion of $1 Period
6%
7%
8%
9%
10% 1
.943396
.934579
.925926
.917431
.909091 2
.889996
.873439
.857339
.841680
.826446 3
.839619
.816298
.793832
.772183
.751315 4
.792094
.762895
.713503
.708425
.683013 5
.747258
.712986
.680583
.644931
.620921 6
.704961
.666643
.630170
.596267
.564474 Using only the information in the table above, approximately how much would you pay today for an investment that pays $0 annual interest, but earns 8% interest over the next four years and has a face value at maturity of $13,500?
(a) $8,000
(b) $9,000
(c) $10,000
(d) $11,000
Q:
Using only the information in the table above, what would the IRR be for an investment that cost $500 in period 0 and was sold for $750 in period 5?
(a) Between 6% and 7%
(b) Between 7% and 8%
(c) Between 8% and 9%
(d) Between 9% and 10%
Q:
The internal rate of return:
(a) Is also known as the investment of investor's yield
(b) Represents a return on investment expressed as a compound rate of interest
(c) Is calculated by setting the price of an investment equal to the stream of cash flows it generates and solve for the interest rate
(d) Can be defined by all of the above
Q:
If an investment earns 12% annually:
(a) An equivalent monthly investment would have to earn a higher equivalent nominal rate to yield the same return
(b) An equivalent monthly investment would have to earn a lower equivalent nominal rate to yield the same return
(c) An equivalent monthly investment would have to earn the same equivalent nominal rate to yield the same return
(d) A relation cannot be determined between a monthly and annual investment
Q:
Which of the following is not a basic component of any compounding problem?
(a) An initial deposit
(b) An interest rate
(c) A period of time
(d) A net present value
Q:
The future value compound factor given for period (n) at 15%:
(a) Would be less than the factor for period (n+1) at 15%
(b) Would be greater than the factor given for period (n+1) at 15%
(c) Would be the same as the factor given for period (n+1) at 15%
(d) Bears no relationship to the factor for period (n+1) at 15%
Q:
Begin with a single sum of money at period 0. First, calculate a future value of that sum at 12.01%. Then discount that future value back to period 0 at 11.99%. In relation to the initial single sum, the discounted future value:
(a) Is greater than the original amount
(b) Is less than the original amount
(c) Is the same as the original amount
(d) Cannot be determined with the information given
Q:
If you saw a table containing the following factors, what kind of interest factor would you be looking at? End of Year
6% 1
1.06000 2
1.12360 3
1.19101 4
1.26247 5
1.33822 (a) Present value of a single amount
(b) Future value of a single amount
(c) Present value of an annuity
(d) Future value of an annuity
Q:
The future value of $1,000 compounded annually for 8 years at 12% may be calculated with the following formula:
FV = $1,000 * (1 + 12%)8
If the same $1,000 was compounded quarterly, what formula would you use to calculate the FV? (C)
(a) FV = $1,000 * (1 + 3%)8
(b) FV = $1,000 * (1 + 12%)32
(c) FV = $1,000 * (1 + 3%)32
(d) FV = $1,000 * (1 + 12%)2
Q:
The future value of a single deposit of $1,000 will be greater when this amount is compounded:
(a) Annually
(b) Semi-annually
(c) Quarterly
(d) Monthly
Q:
Your friend just won the lottery. He has a choice of receiving $50,000 a year for the next 20 years or a lump sum today. The lottery uses a 15% discount rate. What would be the lump sum your friend would receive?
(a) $312,967
(b) $316,426
(c) $500,000
(d) $1,000,000
Q:
At the end of 8 years, your friend wants to have $50,000 saved for a down payment on a house. He expects to earn 8%compounded monthlyon his investments over the next 8 years. How much would your friend have to put in his investment account each month to reach his goal?
(a) $188
(b) $374
(c) $392
(d) $521
Q:
A deposit placed in an interest-earning account earning 8% a year will double in value in ___ years.
(a) 6
(b) 8
(c) 9
(d) 72
(e) It will never double in value
Q:
Your friend has a trust fund that will pay him $100,000 at the end of 10 years. Your friend, however, wants his money today. He promises to sign his trust fund over to you if you give him some money today. You require a 20% interest rate on money you lend to friends. How much would you be willing to lend under these terms?
(a) $16,151.
(b) $50,000
(c) $80,000
(d) $0it would be impossible to earn 20% interest on the loan.
Q:
Ten years ago, you put $150,000 into an interest-earning account. Today it is worth $275,000. What is the effective annual interest earned on the account?
(a) $225,000
(b) 6.00%
(c) 6.25%
(d) 8.33%
(e) 74.99%
Q:
If you deposit $1,000 in an account that earns 5% per year, compounded annually, you will have $1,276 at the end of 5 years. What would be the balance in the account at the end of 5 years if interest compounds monthly?
(a) $784
(b) $1,000
(c) $1,276
(d) $1,283
Q:
The future value of a $1 annuity compounded at 5% annually is greater than the future value of a $1 annuity compounded at 5% semi-annually.
Q:
Assume that an investment, with an single initial cost of $1,000 and a yield of $50 monthly for 10 years, had a 7% IRR in the 60th month and a 7.2% IRR five months later. The IRR can be 6.8% in the 62nd month.
Q:
An investment may have more than one internal rate of return.
Q:
The internal rate of return is the good feeling you get inside when you earn a return on your investment.
Q:
You always see an ordinary annuity used in business and never see an annuity due used in business.
Q:
The future value of $800 deposited today would be greater if that deposit earned 8% rather than 7.75%.
Q:
At 6%, the present value of a $1 payment in 12 months is .941905. At 7%, the present value of a $1 payment in 12 months is .950342.
Q:
One way to calculate the present value of a single payment is with the following formula: PV = FV * (1+i).
Q:
In order to solve a compounding problem, you must know all four of the variables in order to solve for the fifth variable.
Q:
When is seller financing NOT used?
(A) The seller desires to take advantage of the installment method of reporting the gain from sale
(B) The buyer does not qualify for long term mortgage credit because of low down payment or difficulty meeting monthly payments
(C) Third-party mortgage financing is less expensive or easily available
(D) The seller desires to artificially raise the price of the property by offering a lower-than-market interest rate on the mortgage
Q:
Which of the following statements is FALSE regarding foreclosure
(A) In judicial foreclosure, property subject to attachment and execution is limited to the mortgaged property
(B) If the sale of the mortgaged property realizes a price above the claims of the mortgage and expense of the sale, the balance goes to the mortgagor
(C) Redemption can be accomplished by paying 95% of the debt, interest and costs due to mortgage
(D) All of the above
Q:
Which of the following default is LEAST often used for foreclosure?
(A) Failure to fulfill financial obligation
(B) Failure to pay taxes
(C) Failure to pay insurance premiums when due
(D) Failure to keep the security in repair
Q:
Which of the following is NOT an alternative to foreclosure?
(A) Restructuring the mortgage loan
(B) Transfer of the mortgage to a new owner
(C) Redemption
(D) Prepackaged bankruptcy
Q:
The Acceleration Clause says notice of all, but which of the following must be given to the mortgager?
(A) Acceleration of debt secured by the mortgage has taken place because of default
(B) Action required to cure default
(C) Time by which default must be cured
(D) Default
Q:
What is usually executed at the same time as a mortgage and creates the obligation to repay the loan in accordance with its terms?
(A) Recording acts
(B) Ownership interests
(C) Method of payment
(D) Promissory note
Q:
A mortgage agreement provides the lender with ________ interests.
(A) Unsecured
(B) Secured
(C) Nonpossesory
(D) Possesory
Q:
Which of the following terms refers to the prohibition of the commencement or continuation of collection proceedings during a bankruptcy proceeding?
(A) Preferential transfer
(B) Deficiency judgment
(C) Automatic stay
(D) Extension