Deck 3: Central Place Theory and the System of Cities

Question 1

Professional money managers have traditionally divided the investment universe into three major long-run investment "asset classes" plus "cash"). Which of the following is not one of these asset classes:

A) Stocks
B) Real Estate
C) Bonds
D) Mutual Funds

Answer 1

D

Question 2

All of the following are advantages of direct ownership of property as a way of investing in real estate except:

A) Investor retains control over management
B) There is often a "pride of ownership" factor
C) There is still some tax shelter benefit through depreciation
D) The investment is very "liquid"

Answer 2

D

Question 3

Which statement is most accurate?

A) Real Estate is a better inflation hedge than Treasury Bills.
B) Stocks are a better inflation hedge than Real Estate.
C) Long-Term Bonds are a better inflation hedge than real estate.
D) Real estate is a better inflation hedge than stocks.

Answer 3

A

Question 4

All of the following are examples of the "savings objective" of investment except:

A) A 25-year-old planning to be able to buy a house in 5 years.
B) A 30-year-old planning to be able to pay for her children's college in 15 years.
C) A 40-year-old planning for retirement in 25 years.
D) A 65-year-old planning how to use his wealth to support himself now that he is retired.

Question 5

The present value of the future sum of $30,000 two years from now, if the opportunity cost of capital is 15% nominal annual rate of return compounded monthly is:

Question 6

Real estate is approximately what share of the total U.S. investable asset market universe:

A) 5%
B) 10%
C) around a quarter
D) 75%

Question 7

You expect annual cash flows from a certain property as follows: $\begin{array}{|c|c|}\hline \text { Year 1 } & \$ 20,000 \\\hline \text { Year 2 } & \$ 22,000 \\\hline \text { Year } 3 & \$ 30,000 \\\hline \text { Year } 4 & \$ 31,000 \\\hline \text { Year } 5 & \$ 40,000 \\\hline\end{array}$ In addition, you expect that you can sell the property at the end of the 5^th year for 10 times its expected cash flow that year. If the opportunity cost of capital is 10% per year, then what is the net present value NPV) of a deal in which the investor has to pay $350,000 for the property at the end of Year 0, one year prior to the first cash flow)?

A) -$19297.
B) +$3,282.
C) +$38,610.
D) None of the above.

Question 8

You expect to have to make a capital improvement expenditure of $50,000 in a property in 5 years. If you can only set aside at most $800 at the end of each month in a sinking fund, and the annual interest in the sinking fund is 6%, then how many months in advance of the 5-year horizon must you begin saving the money?

A) 35 months.
B) 45 months.
C) 55 months.
D) Starting now 60 months in advance) is already too late.

Question 9

What is the Present Value of property with has a current year NOI of $100,000, which will grow at 3% per year, and can be discounted at a rate of r=8%?

A) $2,000,000
B) $909,091
C) $1,250,000
D) Cannot be determined from given information

Question 10

If you have a perpetuity from T=0 valued at PV=$1,000, and the same cash flow stream results in a perpetuity starting from T=3 valued at $500, how much is the annuity from T=0 until T=3 worth, assuming r=10%?

A) $5,000
B) $500
C) $50
D) Cannot be determined from given information

Question 11

All are ways to break up or add up to) the total return except:

A) Income + Appreciation
B) Yield + Capital Gain
C) Riskfree Rate + Risk Premium
D) Real Return + Inflation Premium
E) Nominal Return + Real Return

Question 12

Suppose you pay $100,000 for a property today. The property appreciates 8% in the first year, and 12% in the second year. The third year yield was 7%. What was the income generated by the property in year 3?

A) $7,000
B) $8,000
C) $8,467
D) $29,427
E) Cannot be computed from the information given.

Question 13

"Liquidity" refers to:

A) Location of real estate investment on a river or seashore.
B) Riskless cash investment such as Treasury Bills.
C) Ability to trade asset shares in a bar or pub.
D) Ability to sell without payment of capital gains taxes.
E) Ability to sell an asset quickly at full value.

Question 14

What is the present value of a 10-year lease with monthly rental payments of $2000 due at the beginning of each month, if the opportunity cost of capital is 8%?

A) $161,042.
B) $164,843.
C) $165,942.
D) Insufficient information to answer the question.

Question 15

You need to borrow $80,000 for a down-payment on a house. You would like to pay the loan off in 15 years. With 9% interest on the loan, what will be your monthly payment?

Question 16

If yields are quoted at 9.00% in the bond market BEY), then what interest rate must you charge in a monthly-payment mortgage MEY) in order to be able to sell the mortgage at par value in the bond market?

Question 17

On Dec.31 2006 you buy a property for $1,000,000. On Dec.31 2007 that property yields $100,000 of net cash flow which you take and spend on a New Year's Eve bash. Also on Dec.31 2007 the property is appraised at $1,010,000 in value, but you don't sell it then. On Dec.31 2008 the property yields another $100,000 in net cash flow which you spend on another bash, in part to celebrate the fact that you sold the property that very day for $1,200,000. There are no other cash flows from this investment.

A) What is the simple HPR total return on your investment in this property for the calendar year 2007?
B) What is the simple HPR total return on your investment in this property for the calendar year 2008?
C) What is the annual time-weighted arithmetic mean periodic total return for this property during the two-year period from the beginning of 2007 through the end of 2008?
D) What is the annual time-weighted geometric mean periodic total return for this property during the two-year period from the beginning of 2007 through the end of 2008?
E) What is the IRR per annum) on your investment in this property "cradle-to-grave" that is, over the entire 2-year period you held the property, from purchase to sale)?

Question 18

You buy a piece of land for $50,000. You think you will be able to sell it for three times this value in four years. Ignoring any net cash flow while you hold the land, what would be your return on this investment, stated in per annum terms with annual compounding?

Question 19

The nominal income return was:

A) 0%
B) 5%
C) 10%
E) 115%

Question 20

All of the following are examples of the "income objective" of investment except:

A) A 65-year-old planning how to use his wealth to support himself now that he is retired.
B) A pension fund trying to match revenues to its current pension payout needs.
C) A university endowment fund wanting to use gift assets to fund an annual scholarship program.
D) A 25-year-old planning to be able to buy a house in 5 years.
E) A bank investing assets so as to be able to pay interest on current savings deposits.

Question 21

You want to take out a fully-amortizing 30-year mortgage. You can afford monthly payments of $600 each. The interest rate is 9%. How much money can you borrow?

A) $6,667.
B) $66,667.
C) $74,569.
D) $80,000.

Question 22

What is the monthly payment on an $80,000, 9% interest-only mortgage?

A) $600.00.
B) $811.41.
C) $1005.78.
D) $7200.00.

Question 23

For the two questions below, consider the following period-by-period total returns:
Year 1: 5.00%
Year 2: 15.00%
Year 3: 25.00%
What is the arithmetic average total return per year for the Years 1-3 period?

A) 5.00%
B) 14.71%
C) 15.00%
D) 15.23%
E) 45.00%

Question 24

If a property will produce net cash flow that grows at a rate of 1.5% per year in perpetuity, and the opportunity cost of capital is 12%, then what is the "cap rate" net cash flow / property value) for the property?

A) 8%.
B) 10%.
C) 10.5%.
D) 12%.

Question 25

For the two questions below, consider the following period-by-period total returns:
Year 1: 5.00%
Year 2: 15.00%
Year 3: 25.00%
What is the geometric average total return per year for the Years 1-3 period?

A) 5.00%
B) 14.71%
C) 15.00%
D) 15.23%
E) 45.00%

Question 26

The nominal appreciation return was:

A) 0%
B) 5%
C) 10%
E) 115%

Question 27

For the two questions below, consider the following period-by-period total returns:
Year 1: 5.00%
Year 2: 15.00%
Year 3: 25.00%
You need to borrow $100,000 for a down-payment on a house, and $900.00 per month is the most you can afford. How long a loan term must you get in your mortgage, if the interest rate is 9%?

A) 15 years 180 months).
B) 20 years 240 months).
C) 30 years 360 months).
D) No solution.

Question 28

The real appreciation return was:

A) 0%
B) 5%
C) 10%
E) 115%

Question 29

All are true, except:

A) The "Risk Premium" is the total expected return minus the risk-free rate.
B) "Risk" is the possibility the ex post return may differ from the ex ante expectation.
C) "Risk" is measured by the standard deviation of the distribution of returns.
D) Higher risk is associated with higher expected returns.

Question 30

Suppose an asset is worth $100,000 now and in one year it will either be worth $115,000 or $95,000 with equal chance). The expected return and risk as defined in Chapter 9) are:

A) 15% return, 20% risk
B) 15% return, 17.4% risk
C) 0% return, 5% risk
D) 0% return, 10% risk
E) 5% return, 10% risk