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460: finance - Study Guide

by: Morgan Marchetti

460: finance - Study Guide 460

Marketplace > University of Arizona > Finance > 460 > 460 finance Study Guide
Morgan Marchetti

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This 23 page Study Guide was uploaded by Morgan Marchetti on Thursday October 23, 2014. The Study Guide belongs to 460 at University of Arizona taught by favreau in Fall. Since its upload, it has received 880 views. For similar materials see finance in Finance at University of Arizona.


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Date Created: 10/23/14
Morgan Marchetti FIN 460 Studyguide Quiz 1 Legal Concepts and Financing True or False 1 Real State refers to the physical land and improvements constructed on the land True 2 Real property refers to the ownership rights associated with real estate True 3 A quitclaim deed says that the grantor quits Whatever claim he has in the property in favor of the grantee True 4 It is illegal to give a quitclaim deed if the grantor has no claim in the property False 5 The term real estate refers to the ownership rights associated with the physical land and improvements False 6 A fee simple estate is a type of freehold estate True 7 As compared to other types of deeds a general Warranty deed provides the most 10 ll 12 13 14 15 comprehensive warranties about the quality of the title to the property True After a house is purchased contractors cannot ask the new owner of the house to pay any bills that were outstanding before the house was sold False A reciprocal easement agreement allows two or more parties to access each other s property True A mortgage is the same thing as a note False A nonrecourse loan is one in which the borrower is personally liable for payment of all amounts due under the terms of the note False Prepayment of a loan without penalty is a right of all borrowers False A second mortgage is a junior lien mortgage that is sometime used to bridge the gap between the price of a property and the sum of the first mortgage and down payment True A fee simple estate is a type of freehold estate True A clause which specifies that the mortgagor will pay all property taxes and other charges assessed against the property even if these charges have priority over the mortgage is 16 17 18 19 20 21 22 23 typically included in a mortgage True A clause which specifies that the mortgagee will obtain and maintain property insurance is typically included in a mortgage False Under lien theory title and the right to possession pass from the mortgagor to the mortgagee when the mortgage is executed False A due on sale clause which specifies that the mortgage can accelerate the debt if the property is sold Without the mortgagee s permissions is a typical clause in a mortgage document True It is a federal law that a mortgage must be recorded to be Valid False A mortgage default can result from failure to pay property taxes True A technical default can result from failure to keep the property in repair True When a purchaser takes a property subject to an existing mortgage the purchaser becomes personally liable for repaying the debt False When a deed is given in lieu of foreclosure of the mortgage the mortgagor no longer has an obligation to pay the mortgage note True 24 Junior liens are eliminated by a voluntary conveyance of a property to the mortgagee False 25 A purchaser at a tax sale receives a deed to the property at the time of the sale False 26 If a debtor under Chapter 7 bankruptcy is not behind on his mortgage payments he does not have the give up the property True 27 Unless stated otherwise the borrower is personally liable for payment of all amounts due under the terms of the note True Multiple Choice 28 A n estate represents the most complete form of ownership of real state the owner is free to divide it up into lesser estates and sell lease or borrow against them as he or she wishes B Freehold C Leasehold D Life E Outright 29 Mr Smith has allowed Mrs Jones to run a sewer line through Mr Smith s backyard so that Mrs Jones has access to the city sewer system This is an example of an Easement 30 Which type of deed offers the grantee the MOST protection General Warranty Deed 31 What term BEST describes a person that owns a property and is conveying title to the property to another person A Mortgagor 2 C Mortgagee D Grantee 32 What type of estate lasts for an indefinite period of time B Estate from year to year C Leasehold estate D Estate for years 33 Which of the following is NOT a good method of title assurance A Seller provides a warranty in the deed B An attorney searches recorded documents C Title insurance is purchased 34 What legal document conveys title from one person to another Deed 35 A historical summary of the publicly recorded documents that affect the ownership of a property is know as an Abstract of Title 36 Which of the following is FALSE regarding a tax sale B The property owner may not have had a court appearance through due process thus creating a cloud on the title C The line of authority for the sale may not be clear D The purchaser is usually expected to pay all delinquent taxes at the time of sale 37 Which of the following is FALSE conceming Mechanic s Lines A Gives the right to attach a lien on real estate B Can get money through forcing judicial sale D Might not be disclosed by the public records 38 A short sale of real estate is A sale in which proceeds from the sale are less than the balance owed on the loan secured by the property sold 39 A mortgage is BEST defined as a legal document that Names real estate as the security or collateral for the repayment of a loan 40 Which of the following solutions is LEAST likely to be acceptable to a mortgagee when discussing alternatives to foreclosing a property A Permanently extending the amortization period B Finding someone else to assume the mortgage C Providing a temporary grace period during which principal and interest are not paid 41 A senior mortgage holder is owed a mortgage balance of 140000 and brings a foreclosure suit which includes all junior claimants in the suit If the senior mortgage holder purchases the property for 140000 at the foreclosure sale What happens to the claim of the junior claimants A The liens of the junior claimants are unaffected and the debt is due upon sale C The liens of the junior claimants and the debt owed to them are extinguished D The liens of the junior claimants are unaffected but the debt owed to them is extinguished 42 A property is encumbered as follows First mortgage A 250000 Second mortgage B 40000 Third mortgage C 10000 How much can mortgagee B pay for the property at a foreclosure sale without having to raise additional funds 290000 43 Which type of bankruptcy is filed with the end result of liquidating the debtor s assets Chapter 7 44 Which type of bankruptcy is available to a business to reorganize and rehabilitate the debtor Chapter 11 45 What is usually executed at the same time as a mortgage and creates the obligation to repay the loan in accordance with its terms Promissory Note 46 Which of the following is NOT an alternative to foreclosure A Restructuring the mortgage loan B Transfer of the mortgage to a new owner D Prepackaged bankruptcy 47 Which of the following default is LEAST often used for foreclosure A Failure to fulfill financial obligation B Failure to pay taxes C Failure to pay insurance premiums when due 48 When is seller financing NOT used A The seller desires to take advantage of the installment method of reporting the gain from sale B The buyer does not qualify for long term mortgage credit because of low down payment or difficulty meeting monthly payments D The seller desires to artificially raise the price of the property by offering a lower thanmarket interest rate on the mortgage 2 TIME VALUE OF MONEY 1 If you deposit 1000 in an account that eams 5 per year compounded annually you Will have 1276 at the end of 5 years What would be the balance in the account at the end of 5 years if interest compounds monthly N 60 512 I 512 PV 1000 PMT 0 2 Ten years ago you put 150000 into an interest earning account Today it is Worth 275000 What is the effective annual interest eamed on the account N 10 PV150000 PMT 0 FV 275000 Your friend has a trust fund that will pay him 100000 at the end of 10 years Your friend however Wants his money today He promises to sign his trust fund over to you if you give him some money today You require a 20 interest rate on money you lend to friends How much Would you be willing to lend under these terms N 10 I 20 PMT 0 FV 100000 At the end of 8 years your friend Wants to have 50000 saved for a down payment on a house He expects to eam 8 compounded monthly on his investments over the next 8 years How much would your friend have to put in his investment account each month to reach his goal N 96 812 I 8 12 PV 0 FV 50000 Your friend just Won the lottery He has a choice of receiving 50000 a year for the next 20 years or a lump sum today The lottery uses a 15 discount rate What would be the lump sum your friend would receive N 20 I15 PMT 50000 FV 0 6 The future Value of a single deposit of 1000 will be greater when this amount is compounded A Annually B Semiannually C Quarterly 7 You lease a 30000 car for 48 months The interest rate is 5 The residual Value is 10000 The monthly payment is N 48 I 5 12 PV 30000 FV 10000 8 A borrower takes out a 30year mortgage loan for 250000 with an interest rate of 5 What Would the monthly payment be N 360 1230 1 512 PV 250000 FV 0 9 An investor buys an annuity which will pay 50000 per year for 20 years Assuming a discount rate of 20 What is the cost of the annuity N 20 I 20 PMT 50000 FV 0 10 A 200000 mortgage has a fixed annual payment of 15000 per year for 20 years What is the interest rate N 20 PV 200000 PMT 15000 FV 0 3 FIXED RATE MORTGAGES TRUEFALSE 1 In ation makes Very little difference to lenders of and investors needing money False 2 Lenders and investors Worry about default interest rate marketability and liquidity risks True 3 Truthinlending requires the borrower to tell the truth on the loan application False 4 The annual percentage rate disclosed at the loan closing closely approximates the borrower s true cost of funds False 5 Prepayment penalties increase the lender s mortgage yield and discount points decrease it False 6 Borrowers with fixed rate mortgages generally benefit if actual in ation is higher than expected in ation True 7 With a reverse annuity mortgage the borrower receives payments from the bank True MULTIPLE CHOICE 8 A borrower takes out a 30year mortgage loan for 250000 with an interest rate of 5 What would the monthly payment be N 360 1230 I 512 PV 250000 FV 0 10 A borrower has a 30year mortgage loan for 200000 with an interest rate of 6 and monthly payments If she Wants to pay off the loan after 8 years What would be the outstanding balance on the loan N 360 1230 I612 PV 200000 PMT 119910 FV N 2212264 I 612 PMT 119910 FV 0 11 A borrower obtains a 150000 reverse annuity mortgage with monthly payments over 10 years If the interest rate of the mortgage loan is 8 What is the monthly payment received by the borrower N120 1012 I 812 PV 0 FV 150000 12 Suppose you Want to borrow 220000 to purchase a house The loan has a term of 30 years and an nominal rate of 45 with monthly payments The first payment is due one month from today A What is the payment amount N360 1230 1 4512 PV 220000 B Suppose you pay 15 in origination fees at closing What is the effective APR N 360 1230 PV 220000 3300O15220000 216700 PMT 111471 FV O C Suppose that you sell the house immediately after the 24th monthly payment What is the balance on the loan N 336 2812 I 4512 PMT 111471 FV O 13 Which of the following is NOT a determinant of interest rates for single family residential mortgages A The demand and supply of mortgage funds B In ation Expectations C Liquidity 14 Risk is an important component of interest rates Which of the following risks is NOT a determinant of interest rates A Default risks B Interest rate risks D Marketability risks 15 Points are also known as A Third party charges B Reduction in payment amount D Reduction of mortgage yield 16 APR stands for which of the following B Amortized percentage regulator C Accrued percentage rate D Annual percentage regulator 17 Assuming all APRs equal the effective interest rate on a loan is highest When A The loan has no points and a 30 year maturity and is prepaid in five years B The loan has no points and is prepaid at maturity C Points are charged and the loan is paid off at maturity in 30 years 18 Which one of the following is TRUE about Prepayment penalties A They are never used with residential mortgages B They lower the effective cost if the loan is repaid before maturity C They are equivalent to charging additional points for the loan 4 ARMS AND OTHER CONCEPTS TRUEFALSE 1 ARMs help lenders combat unanticipated inflation changes interest rate changes and a maturity gap True Lender39s can partially avoid estimating interest rates by tying an ARM to an interest rate index True Negative amortization reduces the principal balance of a loan False The floor of an ARM is the maximum reduction of payments or interest rates allowed True ARMs eliminate all the lender s interest rate risk False The default risk of a FRM is higher than the default risk of an ARM False MULTIPLE CHOICE 9 Which is NOT a component of an ARM A A margin B An index D Caps 10 Which of the following descriptions most accurately reflects the risk position of an ARM lender in comparison to that of a FRM lender Interest Rate Risk Default Risk A Higher Higher 1 2 B Lower Lower 3 C Higher Lower Loan 1 Loan 2 Loan 3 Loan 4 Initial Interest Rate Loan Maturity years 20 20 20 20 Margin Above Index 3 3 3 Adjustment Interval 1 yr 1 yr 1yr Points 1 1 1 1 Interest Rate Cap None 1yr 3yr 11 Which loan in the above table should have the lowest initial interest rate 2 B Loan 2 C Loan 3 D Loan 4 12 Which loan in the above table is a FRM A Loan 1 2 C Loan 3 D Loan 4 13 With which loan in the above table does the lender have the lowest interest rate risk 2 B Loan 2 C Loan 3 D Loan 4 14 Under which scenario is negative amortization likely to occur Payment Cap Interest Rates 1 A None Increasing 2 B None Decreasing 4 D 75 Decreasing 15 If one of the terms of an ARM read interest is capped at 25 what would that mean A The borrower can choose the cap he wants by simply circling the appropriate choice C The interest rate has a 5 annual cap rate and a 2 lifetime cap rate D The interest rate has a 2 annual cap rate and a 5 floor cap rate 16 The expected cost of borrowing does NOT depend on which of the following provisions A The frequency of payment adjustments B The inclusions of caps and floors on the interest rate payment or loan balances C The spread over the index chosen for a given ARM 17 Given that every other factor is equal which of the following ARMs will have the lowest expected cost A An ARM with payment caps and negative amortization B An ARM with interest rate caps C An ARM with longer Adjustment interval 24 questions 8 true and false 16 me Half quantitative In class at 6


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