5. Consider the following statement: The real estate market is considered efficient because all information affecting market price is available at the same cost to all investors. (1) This statement is true. (2) This statement is false because some investors may be more capable of acquiring and utilizing market information because of their size. (3) This statement is false because barriers to entry into a specific sub-market might arise from the localized nature of these markets and the resulting high information costs. (4) Both Options (2) and (3) are correct. 6. Consider the following statement: Ownership forms do not affect liquidity of real estate investment shares. (1) This statement is true because barriers to entry are independent of ownership form. (2) This statement is true because, with individual ownership, liquidity of the investment share is equivalent to the property's liquidity. (3) This statement is false because, apart from individual ownership form, liquidity may depend on the existence of a secondary market and transferability of investment shares. (4) Both Options (1) and (2) are correct. 7. Consider the following statement: The benefits of financial leverage for real estate returns may be eroded if debt cost or overall operating expenses escalate. (1) This statement is false. (2) This statement is true because if interest rates increase substantially on mortgage renewal, net operating income may be insufficient to service debt. (3) This statement is true because if vacancy rates or operating expenses increase substantially, return on equity will be reduced. (4) Both Options (2) and (3) are correct. 8. An investor who requires a before-tax return on equity of 10% is considering purchasing a property that has a mortgage of $800,000. Current mortgage rates are 5% per annum, compounded semiannually, with a 15-year amortization. The investor prefers monthly payments. Lenders typically require a debt coverage ratio of 1.5 for this high-tech property type. Your client asks you to provide an estimate of the net operating income (NOI) and investment value of this property. Using a basic "back-of-the-envelope" analysis, determine which of the following represent the necessary NOI and investment value, respectively, to satisfy the investor's selection criteria? (1) $110,219.95,$1,251,499 (2) $118,483.21;$1,034,675 (3) $103,307.84;$1,336,963 (4) $113,489.92;$1,178,299 2. The effective interest rate may differ from the nominal or stated interest rate dependent on the frequency of compounding. Consider a savings account that states a nominal annual interest rate of 2.5%, compounded semi-annually, with interest payable monthly. Which of the following is the effective annual interest rate? (1) 2.515625% (2) 3.022500% (3) 3.556667% (4) 3.125756% 3. A person buys a townhouse for $350,000. She makes a 20% down payment with the balance financed by a mortgage at the Royal Bank of Canada. The mortgage bears a stated rate of interest at 6.5% per annum, compounded semi-annually, has a 3-year term, and is repayable over 15 years. Payments are made monthly, rounded up to the next higher dollar. In the following excerpts from an amortization schedule, which line represents the outstanding balance for the mortgage at the end of six months? (1) A (2) B (3) C (4) D Assignment continues on the following page Lesson 1: Overview of Real Estate Assets/Markets and Math Review ASSIGNMENT 1, continued 4. Alexa is part of a small team of real estate investors. Her team has recently been presented with an opportunity to invest in a large luxury office tower. The tower is estimated to have a useful life of 30 years. During the purchase process, she learns that two of the investors are unable to contribute sufficient capital to fund the investment. Because of this, arguments arise over who will own the property. With respect to real estate characteristics, this is an example of: (1) illiquidity. (2) indivisibility. (3) longevity. (4) immobility. 9. Consider the following statement: The internet provides reliable information that investors may rely on to make purchases in unfamiliar local markets. (1) This statement is true. (2) This statement is false because the immobility of real estate assets means investors must be familiar with the supply and demand factors influencing the specific local real estate market. (3) This statement is false because much web-based information must be verified through other means. (4) Both Options (2) and (3) are correct. 10. Consider the following statement: Mortgage lenders only incur risk through characteristics of the loan (e.g., loan-to-value ratio), in the nature of the security (e.g., interest in real property), or in the credit worthiness of the purchaser. (1) This statement is true because all other forms of risk are covered by the lender's liability insurance. (2) This statement is true because pension funds have taken a majority position in most investment grade real estate. (3) This statement is false because mortgage lenders may also take an equity position in the property, thereby increasing risk associated with a stated level of return. (4) Both Options (1) and (2) are correct. THE NEXT (2) QUESTIONS ARE BASED ON THE FOLLOWING INFORMATION: Leslie has been apartment shopping in the downtown Vancouver area. She has found an apartment she likes that is valued at $620,000. Based on her salary, she feels she can make monthly payments of $3,550 on a mortgage. The advisor at her bank is offering to extend a mortgage loan at an interest rate of 4.75% per annum, compounded semi-annually, with an amortization period of 20 years. 11. What is the cash down payment Leslie will have to make on the apartment (rounded to the nearest dollar), if she pays the appraised value? (1) $99,813 (2) $73,976 (3) $49,841 (4) $68,497 12. Calculate the annual mortgage constant for this loan. Round the loan amount to the nearest dollar. (1) 0.0572862 (2) 0.0772435 (3) 0.0880231 (4) 0.0915157 13. Which of the following interest rates is equivalent to an effective annual rate of 6.14% ? (1) j2=3.07% (2) j4=6.003486% (3) id=0.051167% (4) isa=5.5% 14. Mora bet Allison $1,000 that she could eat 100 skittles in one minute. Mora lost the bet. Allison has arranged a $1,000 interest accrual loan for Mora, at an interest rate of 8% per annual compounding period. Mora has agreed to repay the full amount of the loan plus all interest at the end of 5 full years. What is the amount Mora must pay back at the end of the loan's 5-year term? (1) $2,158.92 (2) $1,469.33 (3) $1,999.01 (4) $2,367.36 THE NEXT TWO (2) QUESTIONS ARE BASED ON THE FOLLOWING INFORMATION: A buoyant real estate market has resulted in high prices in the Lower Mainland. After searching in North Vancouver for several months, newlyweds Tom and Katie bought their first house, financing it with a $525,000 mortgage. They obtained a rate of 5.5% per annum, compounded semi-annually, fully amortized over 25 years. 15. What is the monthly payment, rounded up to the next higher dollar? (1) $3,205 (2) $3,224 (3) $22,260 (4) $20,068 16. Now assume that the monthly payments are rounded up to the next higher $100. Calculate the outstanding balance owing at the end of three years. (1) $495,000.24 (2) $478,325.78 (3) $489,079.52 (4) $422,338.95 17. Rick is a capital markets investor. A portion of his investment portfolio is allocated to real estate assets of which he has been investing in for the last 10 years. Over this period, he has established his level of risk tolerance, his target return, and a goal of hedging against inflation. He is now being presented with the opportunity to invest in a retail property. As Rick is unfamiliar with the local market in which the property is located, he proceeds to research the real estate environment; which includes demand and supply statistics, information about the legal, social, and political climate, and other factors that could affect his investment. In deciding to make the investment, which of the following is the MOST appropriate next step for Rick? (1) Apply a selection criterion to the investment decision such as the discounted cash flow analysis to derive a return yield (2) Evaluate all the gathered information and financial analyses and decide whether to invest in the property (3) Combine researched market information with property-specific information to determine expected cash flows from the property (4) Conduct a back-of-the-envelope analysis of the investment to derive the value of the property and the appropriate return yield THE NEXT TWO (2) QUESTIONS ARE BASED ON THE FOLLOWING INFORMATION: Jessica buys a new car and finances it with a 5-year loan with monthly payments. At the end of the loan, Jessica will have fully paid off her car. The Excel information below further describes Jessica's loan. 18. The correct Excel formula to find Jessica's monthly payments given the information above is: (1) PMT(D6,D8,D7) (2) PMT(D4,D8,D7) (3) PMT(D5,D8,D7) (4) PMT(D3,D8,D7) 19. Using the CUMPRINC function in Excel, how much principal has Jessica paid off by the end of year two of her loan? Round your final answer to the nearest dollar. (1) $20,560 (2) $1,621 (3) $1,749 (4) $19,621 20. In financial terms, which concept BEST describes calculating the worth today of an investment's future benefits? (1) Principal repayment (2) Equal exchange rates (3) Time value of money (4) Holding period