Question 1

Which of the following gives the lender an option to purchase a full or partial interest in the property at the end of some specified period of time?

Accepted Answer

A)  Convertible loan
B)  Sale-leaseback
C)  Accrual loan
D)  Interest only loanE) A) and B)
F) A) and C)

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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 DCRE) All of the above
F) A) and B)

Question 4

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  True

Question 5

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 lowerE) All of the above
F) A) and C)

Question 6

Financial leverage is defined as benefits that may result to an investor by borrowing money at a rate of interest that is lower than the expected rate of return on total funds invested in a property.

Accepted Answer

A) True 
 B)False

Question 7

The maximum interest rate that could be paid on a debt before the leverage becomes unfavorable is referred to as the:

Accepted Answer

A)  Incremental cost of debt
B)  Break-even interest rate
C)  Favorable interest rate
D)  Optimistic interest rateE) B) and C)
F) A) and B)

Question 8

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 debtor's high interest rate for a lower interest rateE) A) and D)
F) B) and D)

Question 9

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)  $72,000E) A) and B)
F) A) and C)

Question 10

A property produces an 8.92% ATIRR on the total investment considering a tax rate of 28%.What is the maximum interest rate that could be paid on debt without causing the leverage to be negative?

Accepted Answer

A)  12.39%
B)  11.42%
C)  6.42%
D)  9.37%E) C) and D)
F) A) and B)

Question 11

Which of the following is also referred to as a negative amortization loan?

Accepted Answer

A)  Participation loan
B)  Accrual loan
C)  Convertible loan
D)  Interest only loanE) B) and C)
F) A) and C)

Question 12

The loan alternative with the highest ATIRR will always be preferable to the borrower.

Accepted Answer

A) True 
 B)False  False

Question 13

If a property owner borrows money at a rate that is higher than the equity yield rate,negative leverage exists.

Accepted Answer

A) True 
 B)False  True

Question 14

A decrease in financial leverage would be expected to magnify the risk and the potential return of an income-producing property.

Accepted Answer

A) True 
 B)False

Question 15

Properties with a higher ratio of debt are considered to also have a higher risk assuming everything else is equal.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Which of the following would NOT be considered an advantage that an investor might consider under a sale-leaseback of land?

Accepted Answer

A)  The sale-leaseback in effect provides 100% financing on the land
B)  Lease payments are tax deductible
C)  The sale-leaseback provides the same depreciation deductibility with a smaller equity investment
D)  The land may appreciate over the holding periodE) All of the above
F) A) and C)

Question 18

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 19

One benefit of leverage is that it may allow an investor to diversify across several investment properties.

Accepted Answer

A) True 
 B)False

Question 20

An interest-only loan will provide a higher debt coverage ratio than an amortizing loan with the same interest rate.

Accepted Answer

A) True 
 B)False

Exam 12: Financial Leverage and Financing Alternatives

Which of the following gives the lender an option to purchase a full or partial interest in the property at the end of some specified period of time?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following is FALSE regarding interest only loans?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedTrue

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?

Correct AnswerverifiedShow Answer

Financial leverage is defined as benefits that may result to an investor by borrowing money at a rate of interest that is lower than the expected rate of return on total funds invested in a property.

Correct AnswerverifiedShow Answer

The maximum interest rate that could be paid on a debt before the leverage becomes unfavorable is referred to as the:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

A property produces an 8.92% ATIRR on the total investment considering a tax rate of 28%.What is the maximum interest rate that could be paid on debt without causing the leverage to be negative?

Correct AnswerverifiedShow Answer

Which of the following is also referred to as a negative amortization loan?

Correct AnswerverifiedShow Answer

The loan alternative with the highest ATIRR will always be preferable to the borrower.

Correct AnswerverifiedFalse

If a property owner borrows money at a rate that is higher than the equity yield rate,negative leverage exists.

Correct AnswerverifiedTrue

A decrease in financial leverage would be expected to magnify the risk and the potential return of an income-producing property.

Correct AnswerverifiedShow Answer

Properties with a higher ratio of debt are considered to also have a higher risk assuming everything else is equal.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following would NOT be considered an advantage that an investor might consider under a sale-leaseback of land?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

One benefit of leverage is that it may allow an investor to diversify across several investment properties.

Correct AnswerverifiedShow Answer

An interest-only loan will provide a higher debt coverage ratio than an amortizing loan with the same interest rate.

Correct AnswerverifiedShow Answer

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