11_Exam_2_REVIEW.pptx - Exam 2 Review Baruch College...

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Exam 2 Review Baruch College: RES3200 Baruch College: RES3200 1
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RES-3200 2 Baruch College: RES3200 Intro Legal Finance FRM Exam 1 ARM Refi Underwriting Buy vs Lease Exam 2 Commercial RE Pro Forma Underwriting Cap rates Leverage Risk Development Ownership Entity MBS (MPT, CMO) REIT Portfolio Exam 3
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Baruch College: RES3200 3 Finance review (NPV, IRR) Adjustable Rate Mortgages REFI decision Residential Mortgage Underwriting (3 C’s) Residential Valuation Buy vs Lease (Rent + TS - PITIM) Review Roadmap
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Finance Review Investment Definition Investment: claim to a future (possibly risky) stream of cash flows DCF: 30yr Bond , , House: (price), Mortgage: (loan), (frm) Stock: (price), (net of taxes) 4 Baruch College: RES3200
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Baruch College: RES3200 5 Buy asset for $100 now (t=0), Asset pays $104 in one year (t=1), The Net Present Value (NPV) of the investment is a function of the discount rate i For every discount rate i, there is a different NPV(i) IRR : the discount rate that makes NPV equal zero CF0=-100, CF1=+104, F1=1, IRR, CPT, Two equivalent ways of thinking about this investment: A: pay $100 now, get $104 in 1 year, the Yield on investment=IRR=4% B: save $100 now at 4%, in 1 year get back principal $100 plus interest If the required return is do you invest? What is the NPV? NPV, I=12, down, CPT, Invest when required return IRR Finance Review Internal Rate of Return aka Yield
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Baruch College: RES3200 6 Buy office building for 100k now (t=0) Spend 50k developing in the first year (t=1), 30k second year (t=2) Assume you can rent it out while developing , , and sell for 200k in (t=3) Net cash-flows , , (ON EXAM ONLY WRITE FINAL CASH FLOW!!!) Finance Review Internal Rate of Return
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Baruch College: RES3200 7 IRR: the discount rate that makes NPV equal zero CF0=-100k, CF1=-25k,F1=1,CF2=0,F2=1,CF3=235k, IRR, CPT If the required return is do you invest? What is the NPV? NPV, I=12, down, CPT, Invest when required return IRR What if the required return is 27%? Finance Review Internal Rate of Return
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Baruch College: RES3200 8 Finance review (NPV, IRR) Adjustable Rate Mortgages REFI decision Residential Mortgage Underwriting (3 C’s) Residential Valuation Buy vs Lease (Rent + TS - PITIM) Review Roadmap
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Baruch College: RES3200 9 Loan=, Down payment=, House price= Loan to Value ratio (LTV) at origination, Q: Ann gets a loan, her, how much did her house cost? A: , hence Mortgage
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Baruch College: RES3200 10 The balance after k-monthly payments is . Initial balance . The LTV after the payment: equity: The law of motion for ALL debt: 30 year FA-FRM: for all t, , FA: , 30 year IO-FRM, Balloon: , , , , If FRM, , 30 year FA-ARM: resets periodically subject to caps and floors diddo, same LOM Mortgage
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Baruch College: RES3200 11 1/1: initial rate fixed for 1 year, resets every year Hybrid Arms: 3/1, 5/1, A/B: initial rate fixed for A years, resets every B years Index
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