Riviera Terrace Real Estate Investing Q

CFA Level II Alternative Investments
#1

I have a question regarding Schweser Practice Exam 1 (2011 book) afternoon session Question 95.

This question asks you to calculate the CFAT for year 3 of Riviera Terrace Apartments.

I get everything about this problem except for the Interest expense. The answer says that every year the expense is 2,240,000 however based on the third bullet point in the prompt that explains the terms of the interest only mortgage. I get 314,761 which isn’t even close.

Can someone please take a look at this and let me know if you see something that I am missing.

#2

Great problem and you need to know that stuff. I think the fact that it’s an INTEREST-ONLY mortgage has something to do w/ this. What interest rate do they give you? Don’t have the book in front of me sorry.

#3

The investment is financed with a 30 year,7% interest-only loan, with monthly payments and a face value equal to 80% of the initial investment of $40 mil.

Here is how I calculated the annual payment

N=360

I/Y = .5833333

PV = 0

PMT = compute then multiplied by 12 to get 314,762 (which is not anywhere close to 2,240,000 that it is supposed to be.

FV = 32,000,000

#4

Interest only - 2,240,000 = 32,000,000 * .07

that much is paid each year.

when you do it as you have above - you have part interest, part principle being paid (it is an amortization) which is not the same thing.

#5

perfect, thank you for explanation.