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1) Chapter 5
1. A price level adjusted mortgage (PLAM) is made with the following terms:
Amount = $95000
Initial interest rate = 4 percent
Term = 30 years
Points = 6 percent
Payments to be reset at the beginning of each year.
Assuming inflation is expected to increase at the rate of 6 percent per year for the
next five years:
a. compute the payment at the beginning of each year (BOY)
b. what is the loan balance at the end of the fifth year?
c. what is the yield to the lender on such a mortgage?
2. A basic Arm is made for $200,000 at an initial interest rate of 6 percent for 30
years with an annual reset date. the borrower believes that the interest rate at
the beginning of year (BOY) 2 will increase to 7 percent.
a. assuming that a fully amortizing loan is made, what will the monthly payments be
during year 1?
b. Based on a what will the loan balance be at the end of the year (EOY)1?
c. Given that the interest rate is expected to be 7 percent at the beginning of year 2
what will the monthly payments be during year 2
d. What will be the loan balance at the EOY2?
e. What would be the monthly payments in year 1 if they are to be interest only?
2) Chapter 12
1. And investor would like to purchase a new apartment property for $2 million.
however, she faces the decision of where to use 70 percent or 80 percent
financing. the 70 percent loan can be obtained at 10 percent interest for 25 years.
the 80 percent loan can be obtained at 11 percent interest for 25 years.
NOI is expected to be 190,0000 per year and increase at 3 percent annually, the same
rate at which the property is expected to increase in value. The building and
improvements represent 80 percent of value and will be depreciated over (1/27.5 per
year) the project is expected to be sold after five years. assume a 36 percent tax
bracket for all income and capital gains taxes.
a) What would the BTIRR and ATIRR be at each level of financing (assume
monthly mortgage amortization)?
b) What is the breakeven interest rate (BEIR) for this project?
c) What is the marginal cost of the 80 percent loan? what does this mean?
d) Does each loan offer favorable financing leverage? which would you
recommend?
2. You are advising a group of investors who are considering the purchase of a shopping
center complex they would like to finance 75 percent of the purchase price. a loan has
been offered to them on the following terms: the contract interest rate is 10 percent
and will be amortized with monthly payment over 25 years. the loan also will have an
equity participation of 40 percent of the dash flow after debt service. the loan has a
lockout provision that prevents it from being prepaid before year 5.
The property is expected to cos t $5 million. NOI is estimated to be $475000 including overages,
during the first year, and to increase the rate of 3 percent per year for the next five years. the
property is expected to be worth $6 million at the end of five year. The improvement represents
80 percent of cost, and depreciation will be over 39 years. assume a 28 percent tax bracket for all
income and capital gains and a holding period of five years.
a. Compute the BTIRR and ATTIRR after five years, taking into account the equity
participation.
b. What would the BEIR be on such a project? what is the projected cost of the equity
participation financing?
c. Is there favorable leverage with the proposed loan?
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