UNIVERSITY OF CALIFORNIA Final Examination

Haas School of Business Wednesday, May 20, 1998, 8:00 a.m.

BA 280 -- Real Estate and Urban Land Economics

Dr. Edelstein

General Instructions:

  1. Answer each part of the examination in a separate bluebook; answer all three parts of the examination (Parts I, II and III).
  1. You will be given two hours and fifteen minutes to answer all parts; you may allocate your time as you wish.
  1. Follow directions for each part carefully.
  1. All parts count equally for grading purposes.
  1. Computational devices, calculators, slide rules, annuity tables, etc., are permissible aids; no textbooks, notes, computer-calculator manuals or other aids are permitted for student use during the exam.

Part I

(60 POINTS)

For TWO of the following THREE statements, define, evaluate, analyze, and explain each statement (30 points maximum for each response):

a.)  Real interest rates tend to rise during inflationary periods, causing real estate to be a

good hedge against inflation.

b.)  The residential construction cycle is strongly influenced by monetary policy.

c.)  Increased housing market efficiency is the ultimate solution to housing the poor.

Part II

(60 POINTS)

Define, analyze, explain, contrast and evaluate FOUR of the following SIX phrases or terms (15 point maximum for each response):

a.)  Net Asset Value -- Stock Price of REIT's

b.)  The Tilt Problem -- High Expected Inflation

c.)  Asset - Liability Mix for Real Estate Lenders -- Duration, Spread, and Option Risks

d.)  I-O Bonds - P-O Bonds -- Bullish & Bearish Bonds

e.)  Residual (Equity) Value of "plain vanilla" CMO -- Prepayment Speed

f.)  FFO -- Taxable Income

UNIVERSITY OF CALIFORNIA Final Examination

Haas School of Business Wednesday, May 20, 1998, 8:00 a.m.

Part III

(60 POINTS)

Answer all sections of the following analytic question:

THE QUESTION

A potential borrower approaches you with the following loan request:

Existing first mortgage -

$100,000 original mortgage amount

9% original interest rate

30 years original amortization period

Loan is currently 10 years old

The borrower requests a wrap-around mortgage from you in the amount of $200,000, and you offer the following:

$200,000 amount of wrap

10% interest rate on wrap

20 year term of wrap (constant monthly payments)

2 points paid to wrap lender up-front

a.)  If you, as the wrap lender, want an 11.5% pre-tax rate of return if the loan is paid in full in 10 years from today (at which time you pay off the remaining balance of the first mortgage), what should the amount of prepayment penalty be on the wrap around loan (to be paid when the wrap is paid off)? Develop and set-up the analytic framework for solving for the prepayment penalty. Do not solve, unless you wish. (30)

b.)  What will be the effective pre-tax rate of return to maturity on the wrap (i.e., if the loan is not pre-paid)? Do not calculate the answer; explain and show all of your set-up work. (15)

c.)  Alternatively, you offer the borrower a conventional interest only second mortgage with a 10-year balloon. What will the amount of the monthly payment be if you want an 11.5% rate of return. Show how to solve for the monthly payments; explain, but so not solve. (15)

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