Study Questions: Chapter 21 2

Study Questions

CHAPTER 21: INVESTING ANALYSIS

True/False

1. Market risk refers to the variability in investment returns due to changes in general economic conditions.

2. Historically, real estate has been one of the best inflation hedges available to investors.

3. The debt coverage ratio compares the annual net income generated by a project to the investor's total personal and business debts.

4. If the gross income multiplier for a potential real estate investment is higher than the gross income multiplier for similar projects, this is an indication that the purchase price of the potential investment is too high.

5. A mixed trust is the term used to describe a REIT that invests some funds in specifically identified properties and the rest on a blind-pool basis.

6. A CMO is a pass-through security that is insured by an agency of the Federal government.

7. If an investor was negatively levered and the investor's cost

of borrowed funds was nine percent, then what can you conclude about the rate of return generated by the investment?

A. It was less than nine percent.

B. It was exactly nine percent.

C. It was more than nine percent.

D. The rate of return was negative.

E. It is impossible to conclude anything.

8. Which of the following risks refers to the possibility that

money recovered from an investment may not buy the same number of other goods as would the dollars originally invested?

A. Market.

B. Purchasing power.

C. Liquidity.

D. Business.

E. Interest rate.


9. If annual net operating income is $60,000 and annual debt

service equals $25,000, what is the debt coverage ratio?

A. 2.4

B. 0.417

C. $35,000

D. 1.4

E. Cannot determine without knowing the interest rate on the loan.

10. A project requires an initial investment of $300,000. The

net present value of the project is $25,000. What is the

project's profitability index?

A. 0.077

B. 0.083

C. 1.091

D. 1.083

E. Not enough information given to calculate.

11. Which type of REIT controls the most assets?

A. Equity.

B. Mortgage.

C. Hybrid.

D. Finite‑life.

E. Self Storage

12. What are the two major risks faced by investors in mortgage pass-through securities?

A. interest rate and market.

B. prepayment and default.

C. market and liquidity.

D. default and liquidity.

E. interest rate and prepayment.

ANSWERS

1. True

2. True

3. False

4. True

5. True

6. False

7. A

8. B

9. A

10. D

11. A

12. E

Larsen • Real Estate Principles and Practices