Scribd
Upload
80 views

Mid-Term Exam Review REE 6200 FIU Fall 2018: Important Concepts/topics

The mid-term exam for REE 6200 FIU Fall 2018 will cover important concepts in mortgage finance. Students should understand fixed rate mortgages, amortization methods, payment patterns over the life of a loan, effective interest rates, and the impacts of inflation. Additional topics include adjustable rate mortgages, negative amortization, yield calculations, and refinancing decisions. The review provides sample multiple choice questions to help prepare for the exam.

Uploaded by

Joel Christian Mascariña
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
80 views

Mid-Term Exam Review REE 6200 FIU Fall 2018: Important Concepts/topics

The mid-term exam for REE 6200 FIU Fall 2018 will cover important concepts in mortgage finance. Students should understand fixed rate mortgages, amortization methods, payment patterns over the life of a loan, effective interest rates, and the impacts of inflation. Additional topics include adjustable rate mortgages, negative amortization, yield calculations, and refinancing decisions. The review provides sample multiple choice questions to help prepare for the exam.

Uploaded by

Joel Christian Mascariña
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

Mid-Term Exam Review

REE 6200 FIU


Fall 2018

Important concepts/topics:

1. Understand basic concepts on Fixed Rate Mortgage (FRM) and how to calculate monthly
payments, loan maturity, interest rate, present value, and future value using the five-key method.
An application: market value of a mortgage.

2. Understand mortgages with different amortization methods.

3. What are the payment patterns for i). Interest payment, ii). Amortization payment, and iii). Total
monthly payment of the FRM payment over the life of the loan?

4. How to calculate effective interest rates of a FRM, with discount points, loan fees, and early
repayment, and prepayment penalty? Applications: mortgage choice, yield maintenance fee
(YTM).

5. Understand the impacts of inflation on mortgage pricing.

6. Concepts and mechanics of GPM (graduated payment mortgage).

7. Basic features of ARM (adjustable rate mortgage). What are annual interest cap and life cap
associated with an ARM? What is the tradeoff between default risk and interest rate risk for
ARM?

8. Concept of negative amortization in mortgage finance. How to calculate loan balance for a
mortgage with negative amortization (see GPM example in class)?

9. How to calculate effective yield for an ARM, with and without interest caps, or payment caps?
(e.g., BF 5.8).

10. How does teaser rate affect monthly payments of a mortgage?

11. What is incremental cost of borrowing (ICB) and how to calculate it? (BF 6.1).

12. What is cash equivalency? How to calculate it? (BF 6.7).

13. What are buy-down loans? How do they work?

14. Refinancing decision – two methods discussed in class (BF 6.3);

15. What is financial leverage? Positive and negative financial leverage? What is break-even interest
rate?

16. Concept of wraparound loan?

17. Essential criteria and steps for underwriting mortgages.

1
Practice Questions
(Important: the practice questions are just examples. You should study the lecture notes, assignments, and
the textbook to prepay for the exam.)

Part I. Multiple choice questions (choose one out of four choices)

1. Which of the following clauses is most likely to lead to higher default risk for an ARM lender?
A. Negative amortization is not allowed, when interest is not covered by the payment due to a payment cap.
B. There is a payment cap.
C. There is no cap on annual increase of interest rate over years
D. All of the above.

2. 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 a stream of future cash flows.
D. future value of a stream of future cash flow.

3. When purchasing a $210,000 house, a borrower is comparing two loan alternatives. The first loan is a
90% loan at 10.5% for 25 years. The second loan is an 85% loan for 9.75% over 15 years. Both have
monthly payments and the property is expected to be held over the life of the loan. What is the
incremental cost of borrowing the extra money?
A. 20.25%
B. 16.17%
C. 11.36%
D. 12.42%

4. A property is financed with a 75% loan at 11.5% over 25 years. The property produces an ATIRR (i.e., R p,
property return) on total investment of 7.34% based on a tax rate of 31%. What can be said about the
leverage associated with the property?
A. Negative leverage exists
B. Positive leverage exits
C. No leverage exists
D. Can’t tell without knowing the ATIRR on equity

You might also like