Question 1

Under which conditions would one be MOST LIKELY to see an interest rate swap?

Accepted Answer

A)  A borrower wants a fixed rate loan, but the bank only offers floating rate loans; the borrower "swaps" loans with someone who has a fixed rate loan 
B)  A borrower does not have enough equity for a conforming loan, so he or she takes out a "second" mortgage loan 
C)  A borrower does not have enough equity for a conforming loan, so he or she "swaps" mortgage insurance for increased equity investment 
D)  A bankruptcy court orders a lender to "swap" a debtors high interest rate for a lower interest rate

Question 2

A loan in which the lender has an option to purchase an equity interest in a property is known as an):

Accepted Answer

A)  Participation loan 
B)  Accrual loan 
C)  Convertible loan 
D)  Percentage loan

Question 3

One advantage of using leverage is that NOI increases with higher amounts of leverage.

Accepted Answer

A) True 
 B)False

Question 4

Everything else equal, the loan balance on a negative amortization loan will be less than that on an interest-only loan after the first year.

Accepted Answer

A) True 
 B)False

Question 5

A property is financed with an 85% loan-to-value ratio at 10% interest over 25 years. What would the BTIRRE on equity be estimated at given that the BTIRRP is 10.75%?

Accepted Answer

A)  10.1% 
B)  10.4% 
C)  15.0% 
D)  13.2%

Question 6

A lender requires a 1.20 debt coverage ratio as a minimum. If the net operating income of a property is $45,000, what annual amount of debt service would provide the required debt coverage ratio?

Accepted Answer

A)  $37,500 or higher 
B)  $37,500 or lower 
C)  $54,000 or higher 
D)  $54,000 or lower

Question 7

All other things being equal, which of the following best describes the effects of leverage on an investment's risk-return characteristics assuming the expected return is greater than the lending rate)?

Accepted Answer

A)  Lower expected return, lower risk 
B)  Lower expected return, higher risk 
C)  Higher average return, higher risk 
D)  Higher average return, lower risk 
E)  Risk-return characteristics have no role in investment decision making

Question 8

A lender requires a 1.20 debt coverage ratio as a minimum. If the net operating income of a property is $60,000, what is the maximum amount of debt service the lender would allow?

Accepted Answer

A)  $30,000 
B)  $50,000 
C)  $60,000 
D)  $72,000

Question 9

Which of the following is FALSE regarding interest only loans?

Accepted Answer

A)  They usually have balloon payments 
B)  They have greater amortization than conventional loans 
C)  They may result in more cash flow to the investor 
D)  They may allow for a lower DCR

Question 10

When constructing a convertible mortgage, the lender will require a contract interest rate equal to or greater than the market rate on a similar mortgage without conversion option.

Accepted Answer

A) True 
 B)False

Question 11

One advantage of a sale-leaseback is that the lease payments are 100 percent tax deductible.

Accepted Answer

A) True 
 B)False

Question 12

A loan in which the lender receives part of the proceeds from the sale of the property is known as a convertible loan.

Accepted Answer

A) True 
 B)False

Question 13

If a property has positive leverage, the owner should borrow as much as possible.

Accepted Answer

A) True 
 B)False

Question 14

When the internal rate of return on an investment increases as the loan-to-value ratio increases, positive leverage exists.

Accepted Answer

A) True 
 B)False

Exam 12: Financial Leverage and Financing Alternatives

Under which conditions would one be MOST LIKELY to see an interest rate swap?

A loan in which the lender has an option to purchase an equity interest in a property is known as an) :

One advantage of using leverage is that NOI increases with higher amounts of leverage.

Everything else equal, the loan balance on a negative amortization loan will be less than that on an interest-only loan after the first year.

A property is financed with an 85% loan-to-value ratio at 10% interest over 25 years. What would the BTIRRE on equity be estimated at given that the BTIRRP is 10.75%?

A lender requires a 1.20 debt coverage ratio as a minimum. If the net operating income of a property is $45,000, what annual amount of debt service would provide the required debt coverage ratio?

All other things being equal, which of the following best describes the effects of leverage on an investment's risk-return characteristics assuming the expected return is greater than the lending rate) ?

A lender requires a 1.20 debt coverage ratio as a minimum. If the net operating income of a property is $60,000, what is the maximum amount of debt service the lender would allow?

Which of the following is FALSE regarding interest only loans?

When constructing a convertible mortgage, the lender will require a contract interest rate equal to or greater than the market rate on a similar mortgage without conversion option.

One advantage of a sale-leaseback is that the lease payments are 100 percent tax deductible.

A loan in which the lender receives part of the proceeds from the sale of the property is known as a convertible loan.

If a property has positive leverage, the owner should borrow as much as possible.

When the internal rate of return on an investment increases as the loan-to-value ratio increases, positive leverage exists.