Fine 445 - Bcom Real Estate Finance - F15 Practice Midterm Exam Key

Student Name:    __________________           

McGill University                Desautels Faculty of Management

FINE 445: BCOM Real Estate Finance  

F15 Practice Midterm Exam KEY

Maximum Points: 70   Time: 120 minutes

This is a closed book examination. You are allowed to use a calculator and a language dictionary.

==============================================================

Part A: Multiple Choice Questions

ANSWER ON COMPUTER SHEET ONLY. NOTHING ELSE WILL BE GRADED. Choose the relatively most appropriate or the best answer among the alternatives presented.  20 questions, each worth 2 points. Total 40 points.

_____________________________________________________________________

1. [Consider constant payment fixed rate fully amortizing mortgage].Choose the relatively most appropriate statement.                 

A. For a constant payment fixed fully amortizing 6% interest rate mortgage, the mortgage loan balance (excluding prepayment penalties and negative amortization) at the end of a year is the value of the loan balance at the beginning of the year compounded monthly at a rate of 0.5% per month. No, need to consider the monthly payments.

B. Mortgage loan balance (excluding prepayment penalties and negative amortization), at a given point in time, is the present value of the remaining payments till the end of the amortization period, using the mortgage rate as the discount rate.   Yes

C. Both A and B are appropriate.

D. Neither A nor B is appropriate.

2. [Consider constant payment fixed rate fully amortizing mortgage]. Choose the relatively most appropriate statement.

A. The loan balance declines faster than the interest component of the monthly payment during the earlier years of the amortization period. No

B. Consider two mortgages with the same terms (mortgage rate, amortization period, discount points), the higher LTV loan should have a lower all-in or effective cost of borrowing. No (All-In cost does not differ since higher origination fees of the higher LTV loan represents the same percentage discount points).

C. Both A and B are appropriate.

D. Neither A nor B is appropriate.

3. The interest rate risk premium of an ARM is a decreasing function of the interest rate risk to the borrower.

A. True

B. False