Real Estate Finance Home Assignment 1 focuses on financial mathematics, specifically the time value of money. It includes various problems related to interest factors, cash flows, and mortgage calculations, aimed at enhancing understanding for finance students. This assignment is suitable for those studying real estate finance or preparing for related exams. Key topics include calculating future values, internal rates of return, and mortgage payment structures. The assignment is structured to provide practical applications of financial concepts over multiple problems.

Key Points

  • Covers financial mathematics concepts including the time value of money and interest factors.
  • Includes practical problems on cash flows, future values, and mortgage calculations.
  • Designed for real estate finance students and exam preparation.
  • Explores internal rates of return and investment decision-making.
Camille Langlois
Author:Knut Sagmo
5 pages
Language:English
Type:Assignment
Accounting
Camille Langlois
Author:Knut Sagmo
5 pages
Language:English
Type:Assignment
Accounting
175
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BI-Norwegian Business School
ELE 3736
REAL ESTATE
FINANCE
Home Assignment 1
Financial Mathematics:
The Time-Value
of Money
Instructor
Knut Sagmo, Ph.D.
ELE 3736 Real Estate Finance Home Assignment 1 - Financial Mathematics
©
Knut Sagmo 2
Problem 1 Chapter 3 The Interest Factor in Financing
Assume you‘re depositing NOK 5,000 in the bank at the end of every six-month period for the next
12 years at 8.5% interest per year. The first deposit is made six months from today.
(a) How much money do you have in your account after 12 years?
(b) If the deposits were to be made at the beginning of every six-month period,
explain why the future value differs from the one obtained in (a) above!
Problem 2 Chapter 3 The Interest Factor in Financing
Assume you’re invited to invested in a real estate project that’ll generate a cash flow of NOK 750
at the end of every month during the next eight years. Your required rate of return is 17%.
(a) What is the project worth to you (your participation price) today?
(b) What is the accumulated sum of annual cash flows?
(c) Explain the difference between your answers to (a) and (b)!
Problem 3 Chapter 3 The Interest Factor in Financing
You’re considering buying a plot of land for NOK 7,000. In 10 years’ time, the plot is expected to
sell for NOK 15,000. You’re required rate of return is 10%.
(a) Calculate the project’s expected rate of return!
(b) Why should you (not) purchase the plot for NOK 7,000?
Problem 4 Chapter 3 The Interest Factor in Financing
An investment is expected to generate annual cash flows at the end of each year as follows:
Year NOK Cash Flow
1 5,000
2 1,000
3 0
4 5,000
5 6,000
6 864
ELE 3736 Real Estate Finance Home Assignment 1 - Financial Mathematics
©
Knut Sagmo 3
Problem 4, con’t Chapter 3 The Interest Factor in Financing
The up-front cash outlay (investment) today is NOK 13,000.
(a) What is the project’s internal rate of return (IRR)?
(b) Delineate your answer in (a) by showing the annual recovery of
investment as well as interest earned at 10% interest!
Problem 5 Chapter 4 Fixed Rate Mortgage (FRM) Loans
From your local bank, you’ve been offered a fully amortizing, constant payment mortgage (CPM)
of NOK 100,000 at 8% interest per year with end-of-month payments and maturity of 20 years.
(a) Calculate the monthly amount of the constant payment mortgage!
(b) Calculate the sum of total payments on the loan over the 20 year period!
(c) Calculate the sum of total interest payments made over the 20 year period!
(d) What will be the loan balance, and total interest payments, after having
serviced the loan for eight years?
Assume that a down-payment of NOK 5,000 towards the loan balance is done at the end
of the 5. year.
(e) Assuming loan payments are not reduced, how many years will it take until the
loan is fully amortized?
(f) Assuming loan maturity is not shortened, compute the new monthly payment!
Problem 6 Chapter 4 Fixed Rate Mortgages and Effective Yields
A partially amortizing CPM-loan of NOK 90,000 for 10 years is made at 8% interest per year. The
lender and borrower agree that payments are made monthly and that a balance of NOK 20,000 will
remain and be repaid at the end of year 10.
(a) Assuming lender charges 2 points, what is the yield if the loan is repaid at
the end of year 10 as agreed?
(b) What is the loan balance if the loan is fully repaid at the end of year 4?
(c) What is the yield to the lender if the loan is repaid at the end of year 4?
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End of Document
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FAQs

What types of problems are included in this assignment?
The assignment includes a variety of financial mathematics problems related to real estate finance. Students will work on calculating future values of deposits, assessing cash flows from investments, and determining internal rates of return. Each problem is designed to reinforce key concepts in financial decision-making and investment analysis. This practical approach helps students apply theoretical knowledge to real-world scenarios.
How does the time value of money apply to real estate finance?
The time value of money is a fundamental concept in finance that asserts that a sum of money has different values at different points in time due to its potential earning capacity. In real estate finance, this principle is crucial for evaluating investment opportunities, calculating mortgage payments, and assessing cash flows. Understanding how to apply this concept allows investors and finance professionals to make informed decisions about property investments and financing options.
What is the significance of calculating internal rates of return?
Calculating the internal rate of return (IRR) is essential for evaluating the profitability of an investment. In real estate finance, IRR helps investors determine the expected rate of return on their investments over time. A higher IRR indicates a more attractive investment opportunity, allowing investors to compare different projects and make informed decisions. Understanding IRR is crucial for financial analysis and investment strategy development.
What are the key components of a mortgage calculation?
Mortgage calculations typically involve determining the loan amount, interest rate, loan term, and payment frequency. Key components include the principal amount borrowed, the interest rate applied, and the duration of the loan. Understanding how these factors interact is vital for calculating monthly payments and total interest paid over the life of the loan. This knowledge is essential for anyone involved in real estate financing or property investment.
How can cash flow analysis impact investment decisions?
Cash flow analysis is critical for assessing the viability of real estate investments. By analyzing expected cash inflows and outflows, investors can determine whether a property will generate sufficient returns to justify the investment. This analysis helps in making informed decisions about purchasing, holding, or selling properties. Understanding cash flow dynamics is essential for successful real estate investment management.

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