Quiz 17: Investing in Real Estate and Other Investment Alternatives
Business
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Q 2Q 2
With an indirect real estate investment,the investors appoint a trustee to hold legal title on behalf of all the investors in the group.
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Q 4Q 4
People primarily buy a vacation home for tax reasons according to one certified public accountant.
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Q 5Q 5
A real estate syndicate provides professional management and unlimited liability for its members.
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Q 6Q 6
Land purchased with the intent of subdividing it is speculative,because it involves many risks.
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Q 7Q 7
Indirect real estate investments include investing in real estate syndicates,REITs,and participation certificates.
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Q 10Q 10
Passive loss is the total amount of losses from a passive activity minus the total income from the passive activity.
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Q 13Q 13
A syndicate is a temporary association of individuals or firms organized to perform a specific task that requires a large amount of capital.
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Q 14Q 14
Real Estate Investment Trusts are required by federal law to have at least 500 shareholders.
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Q 15Q 15
Real Estate Investment Trusts must distribute at least 90 percent of their taxable annual earnings to shareholders.
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Q 16Q 16
The limited partnership is formed by a limited partner,who has unlimited liability for its debts.
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Q 17Q 17
A REIT is similar to a mutual fund or an investment company,and it trades on stock exchanges or over-the-counter.
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Q 19Q 19
Federal law requires that no more than half the shares in a REIT may be owned by 15 or fewer people.
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Q 20Q 20
A participation certificate is an equity investment in a pool of mortgages or student loans that have been purchased by one of several government agencies.
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Q 21Q 21
First and second mortgages may potentially provide relatively high rates of return due to their special risk characteristics.
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Q 23Q 23
Ginnie Maes and Freddie Macs are guaranteed by agencies closely tied to the federal government,making them as secure as U.S.Treasury bonds and notes.
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True False
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Q 25Q 25
Direct real estate investments include single-family dwellings,duplexes,apartments,undeveloped land,and commercial property.
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Q 26Q 26
Housing will continue to be a not-so-liquid investment that promises steady returns over time.
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Q 29Q 29
A REIT is a firm that pools investor funds and invests them in real estate or uses them to make construction or mortgage loans.
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True False
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Q 31Q 31
A REIT may engage in speculative,short-term holding of real estate to sell for quick profits.
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True False
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Q 33Q 33
You can gain entry to a shopping center investment by investing $5,000 in a limited partnership.
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Q 34Q 34
If you are a limited partner,you are generally liable for losses beyond your initial investment.
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Q 38Q 38
Financial leverage enables you to acquire a more expensive property than you could on your own.
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Q 39Q 39
The tax shelter aspect of real estate syndicates no longer exists due to the Tax Reform Act of 1986.
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Q 40Q 40
Perhaps the largest drawback of direct real estate investments is the absence of large,liquid,and relatively efficient markets for them.
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Q 41Q 41
The percent return on a real estate investment equals net profit divided by the amount invested.
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Q 42Q 42
Diversification in direct real estate investment is difficult because of the large size of most real estate projects.
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True False
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Q 44Q 44
During deflationary or recessionary periods,the values of real estate investments generally increase.
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Q 46Q 46
Gross profit on a real estate transaction equals the selling price minus the purchase price.
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Q 48Q 48
The tax laws prevent real estate investors from taking losses in excess of the actual amounts they invest.
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Q 49Q 49
Factors such as fear of war,political instability,and inflation cause gold prices to decline.
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Q 50Q 50
High interest rates depress gold prices,because they make it very expensive to carry gold as an investment.
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Q 57Q 57
On small gold bars,gold dealers and banks add a five to eight percent premium over the pure gold bullion value.
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Q 60Q 60
Most gold brokers require a minimum order of ten bullion coins and charge a commission of at least two percent.
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Q 62Q 62
Investments in silver,platinum,palladium,and rhodium are not used as a hedge against inflation.
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Q 64Q 64
When you purchase precious stones,it is difficult to determine whether you are getting a good stone.
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Q 65Q 65
Collectibles include rare coins,works of art,antiques,stamps,rare books,paintings,and other items that appeal to collectors and investors.
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True False
Q 66Q 66
Prices of collectibles aren't necessarily cheaper on the web,but it's much easier to compare them.
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True False
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Q 68Q 68
Which one of the following is not required of a REIT by federal law?
A)Distribute at least 90 percent of the taxable annual earnings to shareholders
B)Hire independent real estate professionals to perform certain management activities
C)Have at least 100 shareholders with no more than half of all shares owned by 5 or fewer people
D)Make direct investments only in apartment houses, shopping malls, and other commercial property
E)Invest at least 75 percent of the total assets in real estate
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Multiple Choice
Q 69Q 69
Real estate investments are classified as:
A)participating or nonparticipating.
B)common or preferred.
C)cumulative or noncumulative.
D)direct or indirect.
E)conservative or risky.
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Multiple Choice
Q 70Q 70
An example of an indirect real estate investment is a:
A)single family dwelling.
B)duplex.
C)apartment.
D)undeveloped land.
E)mortgage pool.
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Multiple Choice
Q 71Q 71
An example of a direct real estate investment is a:
A)limited partnership.
B)single-family dwelling.
C)real estate syndicate.
D)real estate investment trust.
E)mortgage pool.
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Multiple Choice
Q 72Q 72
The median price of existing homes:
A)has increased over the past 30 years, thereby acting as a hedge against inflation.
B)has risen less than the Consumer Price Index.
C)always increases in value.
D)tends to be countercyclical, thereby acting as a hedge against the business cycle.
E)remains constant over time.
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Multiple Choice
Q 73Q 73
If you have a vacation home,the after-tax cost of owning it since 1987 has:
A)risen.
B)remained unchanged.
C)declined.
D)equaled annual cost of living changes.
E)equaled the annual inflation rate.
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Multiple Choice
Q 74Q 74
Aside from a home,the real property investment most widely favored by the small investor is:
A)a post office building.
B)land.
C)a large apartment building with 100 or more apartments.
D)a condominium.
E)the duplex, fourplex, or small apartment building.
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Multiple Choice
Q 75Q 75
Which type of REIT invests directly in income-producing real estate?
A)Compound
B)Equity
C)Mortgage
D)Hybrid
E)Simple
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Multiple Choice
Q 76Q 76
Which type of REIT pools money to invest in new shopping malls for the sole purpose of collecting rent?
A)Mortgage
B)Compound
C)Hybrid
D)Simple
E)Equity
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Multiple Choice
Q 77Q 77
About 90% of REITs are _____ REITs.
A)equity
B)mortgage
C)hybrid
D)participation
E)government
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Multiple Choice
Q 78Q 78
In what type of real estate investment do you assume the role of a mortgage or student loan lender receiving interest and principal by check each month?
A)Real estate investment trusts
B)Real estate limited partnerships
C)Participation certificates
D)Real estate syndicates
E)Post office buildings
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Multiple Choice
Q 79Q 79
In what type of real estate investment does the investor not hold legal title to the property?
A)Vacation homes
B)Hotels
C)Apartments
D)Direct investment
E)Indirect investment
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Multiple Choice
Q 80Q 80
An example of an indirect real estate investment is:
A)a single-family home.
B)a duplex.
C)a real estate investment trust.
D)undeveloped land.
E)an apartment building.
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Multiple Choice
Q 81Q 81
REITs,Ginnie Maes,and Freddie Macs are examples of ____________ real estate investments.
A)direct
B)indirect
C)low yield
D)risky
E)speculative
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Multiple Choice
Q 82Q 82
Jane Calvert owns a condominium at the beach which she rents out to vacationers.What type of investment does she hold?
A)Direct investment in real estate
B)Indirect investment in real estate
C)Equity REIT
D)Participation certificate
E)Mortgage REIT
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Multiple Choice
Q 83Q 83
Owen Cartwright has joined a real estate syndicate that bought an office building in downtown Orlando,Florida.What type of investment does he hold?
A)Direct investment in real estate
B)Indirect investment in real estate
C)Equity REIT
D)Participation certificate
E)Mortgage REIT
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Multiple Choice
Q 84Q 84
Which of the following is a true statement?
A)Rental property expenses do not include mortgage interest.
B)Many investors acquire large rental properties initially and then trade down to smaller units.
C)Rental property expenses are not limited for tax purposes.
D)Rental property expenses are treated as a passive loss once they exceed rental income.
E)A passive activity is a business you materially participate in.
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Multiple Choice
Q 85Q 85
Stuart Michelson has invested in several pieces of real estate.Which one of the properties that Stuart owns would be considered commercial real estate?
A)4 bedroom home that he does not rent out
B)20 acre tract of farm land that is sitting idle
C)Fourplex that he rents to college students
D)100 acres of land in the mountains that he hopes to subdivide and sell as residential lots
E)Vacation home.
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Multiple Choice
Q 86Q 86
Andrea Mitchell has joined a real estate syndicate.The syndicate she belongs to was formed by one individual who sold participation units to Andrea and several others.The individual who sold the participation units has unlimited liability and manages the property.Andrea and the others can only lose their initial investment.What type of real estate syndicate has Andrea joined?
A)One organized as a corporation
B)Limited partnership
C)Trust
D)REIT
E)Real estate mutual fund
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Multiple Choice
Q 87Q 87
Jefferson Davis has invested in something that acts like a mutual fund and that invests in hospitals all over the country.He knows there are federal laws that require this type of investment to distribute at least 90 percent of the income to shareholders and that requires there be at least 100 shareholders.What type of investment has Jefferson made?
A)Foreclosures
B)REITs
C)Limited partnerships
D)Participation certificates
E)Direct investment
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Multiple Choice
Q 88Q 88
Harrison Ford has invested in something that acts like a mutual fund and that derives income from interest on loans to real estate owners.He knows there are federal laws that require this type of investment to refrain from engaging in speculative,short-term holding of real estate to sell for quick profits.What type of investment has Harrison made?
A)Limited partnership
B)Equity REIT
C)Mortgage REIT
D)Hybrid REIT
E)Participation certificate
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Multiple Choice
Q 89Q 89
David Harris has invested in something that acts like a mutual fund and that invests in both construction loans and real estate operating companies.This investment trades on the New York Stock Exchange.What type of investment has David made?
A)Limited partnership
B)Equity REIT
C)Mortgage REIT
D)Hybrid REIT
E)Participation certificate
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Multiple Choice
Q 90Q 90
Hal Lindon has an equity investment in a pool of student loans that have been purchased by Sallie Mae.What type of investment is this?
A)Limited partnership
B)Equity REIT
C)Mortgage REIT
D)Hybrid REIT
E)Participation certificate
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Multiple Choice
Q 91Q 91
Which of the following is an investment where a trustee holds legal title to the investment?
A)Commercial property
B)Undeveloped land
C)Office buildings
D)Duplexes
E)Syndicates
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Multiple Choice
Q 92Q 92
Diane Chambers buys an apartment building for $2 million.Which one of the following demonstrates the highest degree of financial leverage?
A)$500,000 down payment and mortgage of $1,500,000
B)$250,000 down payment and loan of $1,750,000
C)$150,000 down payment and loan of $1,850,000
D)$100,000 down payment and loan of $1,900,000
E)$1 million down payment and loan of $1 million
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Multiple Choice
Q 93Q 93
Real property equity investments are usually considered attractive during times of:
A)deflation.
B)disinflation.
C)inflation.
D)recession.
E)unemployment.
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Multiple Choice
Q 94Q 94
One of the advantages of being a limited partner in a real estate investment venture is that you have ____________ liability for losses beyond your initial investment.
A)no financial
B)unlimited
C)product
D)limited
E)implied
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Multiple Choice
Q 95Q 95
General partners in a real estate investment venture have liability for _____financial losses.
A)none of the
B)all of the
C)some of the
D)only exceptional
E)implied
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Multiple Choice
Q 96Q 96
Which of the following is an advantage of investing in limited partnerships,REITs,mortgages,or participation certificates?
A)a possible hedge against inflation.
B)easy entry.
C)no management concerns.
D)financial leverage.
E)All of these.
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Multiple Choice
Q 97Q 97
Real property equity investments ______ provide protection against purchasing power risk.
A)usually
B)always
C)never
D)without exception
E)at no time in the past or future will
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Multiple Choice
Q 98Q 98
Real estate investments provide _____protection against inflation.
A)consistent
B)unusual
C)exceptional
D)some
E)no
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Multiple Choice
Q 99Q 99
Many developers,lenders,and investors were victims of deflation in commercial real estate beginning in the:
A)1960s.
B)1980s.
C)late 1970s.
D)early 1970s.
E)1990s.
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Multiple Choice
Q 100Q 100
Illiquidity in real estate means that:
A)you can quickly find someone who is willing to pay full value to purchase the property.
B)you don't have a water well on the property.
C)you cannot quickly sell the property without a loss in value.
D)you don't have financial leverage.
E)there is an efficient market for the property.
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Multiple Choice
Q 101Q 101
Diversification in direct real estate investments is:
A)difficult.
B)easy.
C)always available.
D)limited because of the small size of most real estate projects.
E)never available.
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Multiple Choice
Q 102Q 102
Which one of the following real estate investments provides various levels of diversification?
A)REITs
B)Ginnie Maes
C)Freddie Macs
D)Other syndicates
E)All of these
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Multiple Choice
Q 103Q 103
The ability of investors to deduct their real estate losses from wages,salaries,dividends,and interest is an aspect of a real estate syndicate that:
A)no longer exists.
B)is strengthened by the Tax Reform Act of 1986.
C)has remained unchanged since 1980.
D)improves the liquidity of real estate syndicates.
E)is available only to limited partners.
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Multiple Choice
Q 104Q 104
Presently,you are required to use which method of depreciation in real estate investments?
A)Sum-of-the-digits
B)Straight-line
C)Rule of 78s
D)Last In First Out
E)First In First Out
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Multiple Choice
Q 105Q 105
For residential real estate investments,the depreciation period is ____________ years.
A)7 1/2
B)17 1/2
C)20 1/2
D)27 1/2
E)31 1/2
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Multiple Choice
Q 106Q 106
For all types of real estate investments,except residential ones,the depreciation period is ____________ years.
A)7 1/2
B)17 1/2
C)20 1/2
D)27 1/2
E)31 1/2
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Multiple Choice
Q 107Q 107
The investment tax credit has been eliminated entirely for all types of real estate except:
A)low-income housing projects.
B)single-family dwellings.
C)shopping centers.
D)raw land.
E)developed land.
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Multiple Choice
Q 108Q 108
Which of the following is a possible disadvantage of real estate investments?
A)Lack of involvement in property maintenance
B)Hedge against inflation
C)Illiquidity
D)Lack of financial risk
E)Capital requirements for total venture may be high
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Multiple Choice
Q 109Q 109
Which of the following can be a management problem when investing directly in real estate?
A)Maintaining the rental property
B)Inability to sell your interest in a limited partnership
C)Disagreements among syndicate members
D)Limited financial liability
E)Financial planners do not support buying small properties.
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Multiple Choice
Q 110Q 110
During which of the following economic periods is the price of a precious metal,such as gold,silver or platinum,likely to increase?
A)Recession
B)Depression
C)Peace time
D)Deflationary
E)Inflationary
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Multiple Choice
Q 111Q 111
Investors buy precious metals as a safe haven during:
A)a recession.
B)a depression.
C)an economic upheaval.
D)deflation.
E)political stability.
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Multiple Choice
Q 112Q 112
Easing of international tensions or disinflation cause gold prices to:
A)skyrocket.
B)increase moderately.
C)remain stable.
D)decline.
E)change, but the direction of the change cannot be predicted.
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Multiple Choice
Q 113Q 113
Increasing interest rates in the economy cause gold prices to:
A)skyrocket.
B)increase moderately.
C)remain stable.
D)decline.
E)change, but the direction of the change cannot be predicted.
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Multiple Choice
Q 114Q 114
In general,the price of gold:
A)is stable.
B)fluctuates daily.
C)changes monthly.
D)is unaffected by political upheavals.
E)is unaffected by economic conditions.
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Multiple Choice
Q 115Q 115
The basic unit of gold bullion is one _____ of 0.995 fine gold.
A)kilogram.
B)troy ounce.
C)pound.
D)ton.
E)wafer.
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Multiple Choice
Q 116Q 116
On larger gold bars,dealers and banks add a ____________ percent premium over the pure gold bullion value.
A)1 to 2
B)3 to 5
C)5 to 8
D)6 to 7
E)9 to 12
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Multiple Choice
Q 117Q 117
Popular gold bullion coins today include:
A)Australia's kangaroo nugget.
B)Canadian gold maple leaf.
C)Mexican 50 peso.
D)Chinese Panda.
E)All of these.
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Multiple Choice
Q 118Q 118
Jeremy Fischer has just purchased 20 American eagle gold coins from a broker.What type of investment does he hold?
A)Direct investment in real estate
B)Indirect investment in real estate
C)Precious metals
D)Ceramics
E)Gems
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Multiple Choice
Q 119Q 119
Brian Wilson has several baseball cards passed down to him from his grandfather.He is particularly proud of the signed Hank Aaron baseball card that he has.What type of investment does he hold?
A)Direct investment in real estate
B)Indirect investment in real estate
C)Precious metals
D)Collectibles
E)Gems
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Multiple Choice
Q 120Q 120
Lynn Roy owns three,two-carat diamonds that she received from her grandmother who did not believe in banks or stocks and bonds.What type of investment does she hold?
A)Direct investment in real estate
B)Indirect investment in real estate
C)Precious metals
D)Collectibles
E)Precious stones
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Multiple Choice
Q 121Q 121
If a gold bullion bar does not remain in the possession of the dealer or bank that sells it,what must happen before it can be resold?
A)It must be made into coins.
B)It must be pounded flat.
C)It must be reassayed.
D)It must be turned into jewelry.
E)It must be taxed.
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Multiple Choice
Q 122Q 122
It is much easier today to find and trade in collectibles than it was in prior years.Which one of the following is primarily the reason for this?
A)Telephone
B)Web (Internet)
C)Magazines
D)Plane travel
E)Automobiles
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Multiple Choice
Q 123Q 123
A vacation home is deemed a second home so long as you rent it no more than ________ per year.
A)one month
B)14 days
C)7 days
D)8 weeks
E)4 weeks
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Multiple Choice
Q 124Q 124
What is the approximate annual depreciation for tax purposes on residential real estate purchased at a cost of $200,000?
A)$6,349
B)$20,000
C)$2,750
D)$7,273
E)$6,667
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Multiple Choice
Q 125Q 125
Austin has invested $25,000 as one of 10 limited partners in a large shopping center that was purchased for $800,000.The shopping center has been unsuccessful and the four general partners fear that the property could be foreclosed upon soon.What is the most Austin might lose if the project fails?
A)$80,000
B)$57,143
C)$200,000
D)$25,000
E)$20,000
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Multiple Choice
Q 126Q 126
An advantage of purchasing diamonds for investors is that:
A)diamonds are not easily turned into cash.
B)diamonds are small and easy to conceal.
C)diamonds are largely controlled by DeBeers Consolidated Mines of South Africa.
D)the grading of diamonds is not an exact science.
E)diamonds are typically bought at retail and sold at wholesale.
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Multiple Choice
Q 127Q 127
Home ownership rates are highest among those individuals in which age group?
A)Under 34
B)35 - 44
C)45 - 54
D)55 - 64
E)65 and over
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Multiple Choice
Q 128Q 128
De Beers Consolidated Mines of South Africa controls what percent of the world's supply of rough diamonds?
A)50
B)65
C)75
D)85
E)95
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Multiple Choice
Q 129Q 129
In 2011,which country was the world's largest producer of gold?
A)China
B)Australia
C)U.S.
D)Russia
E)Canada
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Multiple Choice
Q 130Q 130
Which of the following is not a characteristic used to grade certified diamonds?
A)Weight
B)Country of origin
C)Clarity
D)Quality of cut
E)Color
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Multiple Choice
Q 131Q 131
The primary reason people buy a vacation home is:
A)to use as a family vacation retreat.
B)for tax reasons.
C)for rental income.
D)for their grown children to live in.
E)to eventually use it as their primary residence.
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Multiple Choice
Q 132Q 132
A REIT is a firm that pools investor funds and invests them in real estate or uses them to make what kind of loans?
A)New car loans
B)Construction loans
C)Mortgage loans
D)Both construction and mortgage loans
E)Car, construction, and mortgage loans
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Multiple Choice
Q 133Q 133
The first gold bullion coin ever produced by the U.S.government was issued in what year?
A)1963
B)1968
C)1975
D)1980
E)1986
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Multiple Choice
Q 134Q 134
Coin dealers,precious metals dealers,and some banks sell gold bullion in amounts ranging from _____ grams to 500 ounces or more.
A)5
B)10
C)25
D)50
E)There is no minimum order.
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Multiple Choice
Q 135Q 135
Besides gold,other metals that are used as a hedge against inflation include the following,except:
A)silver.
B)aluminum.
C)platinum.
D)palladium.
E)rhodium.
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Multiple Choice
Q 136Q 136
Which of the following has lessened the appeal of investing in real estate?
A)Hedge against inflation
B)Professional management
C)Financial leverage
D)Tax Reform Act of 1986
E)National Association of Realtors
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Multiple Choice
Q 137Q 137
At the beginning of 2016,home ownership in the United States:
A)had soared since 1997.
B)was lower than in 1997.
C)had increased dramatically since 2004.
D)was the same as in 1997.
E)was unchanged since 2004.
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Multiple Choice
Q 138Q 138
Over the past 30 years,the median price of existing homes has increased an average of more than _____ percent every year.
A)5
B)6
C)7
D)10
E)11
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Multiple Choice
Q 139Q 139
According to the National Association of Realtors,home values nearly double every _____ years.
A)5
B)6
C)7
D)10
E)11
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Multiple Choice
Q 140Q 140
Austin has invested $50,000 as one of 5 general partners in a large shopping center that was purchased for $900,000.The shopping center has been unsuccessful and the 15 unlimited partners fear that the property could be foreclosed upon soon.What amount is Austin liable for if the project fails?
A)$60,000
B)$18,000
C)$180,000
D)$900,000
E)$50,000
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Multiple Choice
Q 141Q 141
What is the approximate annual depreciation for tax purposes on other types of real estate besides residential real estate if the property was purchased at a cost of $300,000?
A)$10,000
B)$11,111
C)$3,000
D)$9,524
E)$10,909
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Multiple Choice
Q 142Q 142
Which of the following do not create management problems?
A)REITs
B)mortgages
C)participation certificates
D)limited partnerships
E)None of these create management problems.
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Multiple Choice
Q 143Q 143
Suppose you invested $10,000 of your own money and had a $90,000 mortgage with interest rate of 6.5 percent.After one year,you sell the property for $140,000.What is your gross profit?
A)$10,000
B)$90,000
C)$130,000
D)$50,000
E)$40,000
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Multiple Choice
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Essay
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Essay
Q 146Q 146
Explain the difference between direct and indirect investments in real estate.Give examples of each.
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Essay
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Essay
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Essay
Q 149Q 149
Mary Simpson bought a rental property for $200,000 cash.Later she sold the property for $230,000.What was her profit and return on this investment?
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Essay
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Essay
Q 151Q 151
Your parents own a vacation home and find it more difficult to spend as much time there as they once did.They are thinking about continuing to use it as a vacation retreat but also want to periodically rent it and use it as an investment.Discuss the issues they should consider when making this decision.
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Essay