CFA Practice Question

There are 195 practice questions for this study session.

CFA Practice Question

Which factor will cause the terminal cap rate to be lower than the going-in cap rate?
A. Uncertainty about what the NOI will be in the future.
B. Growth rate will be lower as the property will be older.
C. Interest rates are expected to be lower.
Explanation: A terminal cap rate may be lower than the going in cap rate if between the present time and end of a holding period interest rates are expected to fall, risk is expected to decline, or demand is expected to increase (thereby producing higher rents and/or appreciation).

In practice a slightly higher rate is usually used because of the additional uncertainty associated with estimating what the cash flow will be when the property is sold to the new owner, and because the property is older and may not have the same income potential as it had at the beginning of the holding period.

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