Free Investment (Property) Questions and Answers 1 — Questions and Answers

Question 1: Which kind of bond is the most secure?

Municipal bond
U.S. Treasury bond (Correct answer)
Don't know/Not sure
Corporate bond

Correct answer: U.S. Treasury bond

The federal government issues "treasuries." Unlike corporate or municipal bonds, they are backed by the US government's "full faith and credit," which ensures that interest payments are always made and bonds are redeemed at maturity.

Question 2: In general, higher-risk investments produce higher returns over time than lower-risk investments.

TRUE (Correct answer)
FALSE

Correct answer: TRUE

Over time, the stock and bond markets tend to reward risk-taking. The risk-reward tradeoff is what it's called. However, high-risk investments like small-company stocks can be exceedingly volatile in the near run. The less inclined you are to take that risk, the more you should focus on investments like short-term bonds, which provide a consistent return with less volatility.

Question 3: Which of the following institutions protects you against stock market losses?

None of the choices (Correct answer)
SEC (Securities and Exchange Commission)
FDIC (Federal Deposit Insurance Corporation)
FINRA (Financial Industry Regulatory Authority)

Correct answer: None of the choices

When you buy stocks, you accept the risk that the value of your investment may fall as well as gain. Securities regulators like FINRA and the SEC are in charge of enforcing securities laws and regulations and punishing those who break them. When an FDIC-regulated bank fails, the FDIC covers checking, savings, and other deposit accounts. The Securities Investor Protection Corporation (SIPC) is tasked with returning monies and securities to investors in the event that the brokerage firm holding these assets goes bankrupt.

Question 4: Which of the following best explains why municipal bonds have lower yields than other government securities?

There is a greater demand for municipal bonds
Municipal bonds can be tax-free (Correct answer)
Not sure
Municipal bonds are lower risk

Correct answer: Municipal bonds can be tax-free

Municipal bond dividend payments are normally tax-free, even if they have lower yields than other government bonds, so their after-tax rates of return are appealing to investors in higher tax bands.

Question 5: Which definition of "selling short" is the most accurate?

Selling a stock before it reaches its high point.
Shortly after purchasing a stock, you sell it.
A stock that has been borrowed is being sold. (Correct answer)
A stock is sold at a loss when it is sold at a loss.

Correct answer: A stock that has been borrowed is being sold.

Short selling entails borrowing stock from a broker via a margin account and selling it with the knowledge that it will be purchased and returned to the broker later. If the stock drops in value, as the short seller hopes, the investor would profit because the stock borrowed and sold was worth more than the stock later acquired and returned to the broker. If the stock's value rises, the investor must pay the difference to the broker to make good on the shares owing to him.

Question 6: A Section 529 Plan is a tax-advantaged approach to save for the:

Not sure
College (Correct answer)
Retirement
Long-term medical treatment

Correct answer: College

Portion 529 plans, named after the section of the federal tax code that controls them, are tax-advantaged programs that assist families in saving for college.

Question 7: If you invest in a company's stock...

Your initial investment will be returned to you plus interest.
You are financially responsible for the company's debts.
You have a stake in the corporation. (Correct answer)
You have made a financial contribution to the firm.

Correct answer: You have a stake in the corporation.

Stocks are called "equities" because each stock share represents a small fraction of a company's ownership, entitles the shareholder to vote in the election of directors and other items discussed at shareholder meetings or via proxy.

Question 8: Bond prices generally _________ as interest rates fall.

Not sure
Are not impacted
Ascend (Correct answer)
Descend

Correct answer: Ascend

The cardinal law of bonds is that bond prices rise when interest rates decrease, and bond prices fall when interest rates rise. This is because as interest rates rise, newer bonds come to market that offer higher interest yields than older bonds already in investors' hands, reducing the value of older bonds.

Question 9: How many homes are there in a multi-family residential building?

Five or more
One to four
More than one but fewer than six
Two or more (Correct answer)

Correct answer: Two or more

By definition, 'multi-family' means more than one family, so the minimum is two or more separate living units. 'Five or more' and 'fewer than six' impose arbitrary limits that aren't part of the definition, and 'one to four' would include a single-family home, which isn't multi-family at all.

Question 10: Which of the following information should be included in every business lease, in addition to the property address, the lease agreement start and end dates, and the monthly rent and deposit amounts?

A complete list of the other tenants and their rental rates
A detailed description of the property
A copy of the tenant's credit report
The purpose for which the space is being rented (Correct answer)

Correct answer: The purpose for which the space is being rented

Beyond the address, dates, rent, and deposit, a commercial lease must state the permitted use — the purpose for which the space is rented — so both parties agree on how the property may be used. The other options aren't standard lease terms: other tenants' rates are confidential, a property description is unnecessary, and a credit report is part of screening, not the lease itself.

Question 11: The risk that an investor cannot secure financing at an affordable rate is called ______ risk.

Business
Financial
Capital (Correct answer)
Leverage

Correct answer: Capital

Capital risk is the risk that an investor cannot obtain the funds (capital) needed for an investment at an affordable rate. Business risk relates to operational performance, financial risk to the use of debt, and leverage risk to magnified losses from borrowing — none of which specifically describe the availability and cost of financing.

Question 12: Which of the following statements is true regarding a tenant's indemnity?

Which of the following statements is true regarding a tenant's indemnity?
Which of the following statements is true regarding a tenant's indemnity? (Correct answer)
Indemnity provisions in the lease rarely require that a tenant pay a landlord for damages in the event a claim is filed against the landlord.
Landlords seldom agree to a tenant's request to be indemnified from and against all liability, damage, and expense arising from matters related to the common areas of the building.

Correct answer: Which of the following statements is true regarding a tenant's indemnity?

A tenant's indemnity clause is an agreement by the tenant to protect (reimburse) the landlord against liability, damages, and expenses arising from claims related to the leased space. Tenants commonly do agree to indemnify the landlord, and indemnity provisions frequently — not rarely — require the tenant to cover such costs, which makes the other statements inaccurate.

Question 13: Which of the following is true about the GRM method?

Appraisers rely solely on the GRM method to appraise small residential investment properties.
The method can't be used alone as an indication of value for residential property. (Correct answer)
Comparable rental properties play no part in the method.
The more rental properties there are in an area, the less reliable the method is.

Correct answer: The method can't be used alone as an indication of value for residential property.

The Gross Rent Multiplier is a quick estimate based only on gross rental income, so it can't stand alone as a reliable indicator of a residential property's true value — it ignores expenses, condition, and other factors. Appraisers therefore use it alongside other methods, and comparable rentals are part of deriving the multiplier, so the other statements are false.

Question 14: Which of the following applies in order for landlords of rental properties to be excluded from fair housing laws?

The owner doesn't own more than four single-family homes.
The owner occupies a building with not more than six families.
The owner occupies a building with not more than four families. (Correct answer)
The owner uses a real estate licensee to rent the dwelling.

Correct answer: The owner occupies a building with not more than four families.

Under the Fair Housing Act's 'Mrs. Murphy' exemption, an owner-occupied building with no more than four families (units) can be excluded from certain provisions. Six families exceeds the limit, the single-family exemption applies to owners of three or fewer homes (not four), and using a real estate licensee actually voids the exemption.

Question 15: Which of the following statements is true about tax credits for investors who build affordable housing?

Investors who build affordable housing may receive a tax credit of 4%, 6%, or 9%.
Investors who receive tax-exempt bonds are eligible for a tax credit of 9%.
Investors who have development costs that equal or exceed $6,000 may receive a tax credit of 6%.
The tax credit the investor receives is a dollar-for-dollar reduction in taxes owed. (Correct answer)

Correct answer: The tax credit the investor receives is a dollar-for-dollar reduction in taxes owed.

The Low-Income Housing Tax Credit is a tax credit, meaning it reduces taxes owed dollar-for-dollar — far more valuable than a deduction, which only lowers taxable income. The specific percentages and dollar thresholds in the other options are inaccurate or fabricated figures, not the defining feature of the credit.

Question 16: Grady plans to develop a community shopping center. What size lot will he need?

10- to 40-acre (Correct answer)
Seven- to 16-acre
Eight- to 20-acre
Eight- to 10-acre

Correct answer: 10- to 40-acre

A community shopping center — anchored by stores plus ample parking and common areas — typically requires a 10- to 40-acre site. The smaller acreages listed are more appropriate for neighborhood centers, which serve fewer tenants and customers and need less land.

Free Investment (Property) Questions and Answers 1

Which kind of bond is the most secure?