IA Week 13
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31 Terms
1
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What are upfront housing costs?
Down payment plus closing costs and points
2
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What is a typical down payment range?
About 3.5 percent to 20 percent of purchase price
3
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What are mortgage points?
Upfront interest equal to 1 percent of the loan amount
4
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Why do lenders charge points?
To recover costs increase profit and allow pricing flexibility
5
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What is the tradeoff when paying points?
Higher upfront cost for a lower interest rate
6
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What is a breakeven point for points?
Time needed for interest savings to recover upfront cost
7
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Why does time value of money matter in breakeven analysis?
Future savings are worth less than money paid today
8
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What does character mean in lending?
Borrower’s willingness to repay debt
9
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What is a credit score?
A measure of ability and willingness to repay credit
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What is the FICO score range?
300 to 850
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Which factor has the highest weight in a FICO score?
Payment history
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What behavior most improves credit score?
Making payments on time
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What behavior hurts credit score the most?
Missed or late payments
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What are the three major credit bureaus?
Experian Equifax and TransUnion
15
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What does collateral represent in lending?
Assets pledged to secure the loan
16
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What are the three main real estate appraisal approaches?
Sales comparison income approach and replacement cost
17
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What is the sales comparison approach?
Valuing property using prices of similar recent sales
18
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What is the income approach to valuation?
Valuing property based on income it generates
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What is Net Operating Income NOI?
Income after operating expenses but before financing
20
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What does the capitalization rate represent?
Unlevered return based on income relative to value
21
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How are cap rate and value related?
Higher cap rate implies lower property value
22
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What is the IRV relationship?
Income equals cap rate times value
23
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What is a derivative?
A contract whose value depends on an underlying variable
24
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What are the four main derivative types?
Forwards futures swaps and options
25
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What is the key difference between stocks and options?
Options expire and convey no ownership rights
26
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What is a call option?
Right but not obligation to buy at a strike price
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What is a put option?
Right but not obligation to sell at a strike price
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What does moneyness describe?
Whether an option has intrinsic value
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When is a call option in the money?
Stock price is above the strike price
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What is intrinsic value?
Value from immediate exercise of an option
31
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Why are put options compared to insurance?
They limit downside risk while allowing upside
Note 
Flashcards (312)