Sunday, April 26, 2009

The Bond See-Saw

Many test questions based on math concepts are presented without numbers, which actually makes things harder to deal with. Let's take a look at an example early on a Sunday morning:

If your customer purchases a corporate bond whose face amount exceeds the market price, which of the following statements is inaccurate?
A. the bond's yield to maturity will exceed its current yield
B. the bond's curent yield will exceed its nominal yield
C. the bond's nominal yield will exceed its yield to maturity
D. all choices listed

EXPLANATION: first, the way this question is worded is intentionally deceptive. You see the word "exceeds," and you automatically read it as if the market price exceeds the par value. No--just the opposite. The phrase describes a discount bond. I bet 40% of all test-takers would miss that right off the bat and, therefore, continue down a path of doom. Second, the question exploits the inherently intimidating relationship between bond prices and bond yields. Third, by asking which statement is in-accurate, the test question takes it all up to an even higher, nastier level. What should you do? I recommend smiling and taking a deep breath, realizing that anyone who chooses to write tricky Series 7 questions as a career path can't be all that damned smart--this question can be figured out with patience and confidence. As always, attack a problem step-by-step. Step one--what the heck are you being asked? The question is saying, in its deceptive way, that a bond was purchased at a discount. Step two, what does that mean? It means that all yields will rise above the yield printed on the bond (nominal yield), and they go up in this order: current yield, yield to maturity, yield to call. Once you have that visual, you just start eliminating wrong answers. Unfortunately, if the statement is true, you have to eliminate it. Oy! Okay, the first statement is true--YTM will be higher than current yield, so A is eliminated. The next statement is true--current yield will be higher than nominal yield--so B is eliminated. Now, many test-takers get a false sense of rhythm and confidence. They feel a "flow" building and get too lazy to really read Answer Choice C, assuming that all three statements are probably false because, well because they're done thinking about this damned question.
No way. I learned from my years of throwing elbows on the basketball court that you have to hustle right through the final buzzer. You snooze for one second, and your man can get by you and win the game. When my opponent is some weasle like the Series 7, I am just not willing to let him shuck-and-jive his way past me for a cheap point. So, is Choice C true or false? Is the YTM lower than the nominal yield? No, so we eliminate it, right? Only if we want to lose--remember, we're still looking for the in-accurate statement. C is in-accurate and, therefore, it is the correct answer.


Don't get discouraged--not all Series 7 questions are this hard. In fact, if they were, few would pass it. Approximately 67% of all test-takers pass the Series 7 on any given day, so there is no way that all the questions could hit this hard. However, a certain percentage do hit this hard. Therefore, if you can get in shape to handle even the hard-hitting questions like the one we just looked at, you will pass with flying colors. Remember that the bond see-saw is fundamental on the Series 7, providing some of the trickiest questions of all. If you need extra help send me an email.


  1. I don't mean to be forward, but are you, like, in a relationship?

  2. As a matter of fact, I am. With the most wonderful woman in the world, no exaggeration. Maybe the three of us can go out to dinner one night after you pass your exam.

  3. Mr.Walker, what process did you utilize to bring you to this point? to the point where you can actually teach this subject. I've failed the 7 and have yet to redeem myself. When you took the series 7, how long did you study (months, weeks, etc?). Should I take 6 months to study? I'm making myself ill thinking about this exam.

  4. The frustration you're feeling is very common--FINRA is basically asking you this question: How much do you want your license? It's a hazing ritual designed to weed out those who don't really want to manage people's investments for a living. If you REALLY want to pass the Series 7, you will pull it off. I wish more people would post comments on how they managed to pass the exam, and I would encourage you to ask others--especially those who struggled--how they did it. Without being too cocky, I don't think it's relevant to talk about what I did--I have the ability to learn large amounts of difficult information quickly and retain it. I didn't need a special strategy--I simply absorbed the Series 7 one page and one practice question at a time. I provide online tutoring and can send some info on that if you email me at

  5. Do you really think this is a hard question or are you just trying to make the "dummies" feel better? Seriously, do you really think this is deceptive, intimidating, nasty and tricky? Really?

  6. it's a challenging question, yes. If you find it easy, that is a good sign. Do I find it tricky? No. I don't find many Series 7 questions to be tricky. My customers do, though, so I try to help them with what many find to be challenging questions. Keep up the good work.

  7. I studied my @$$ off for the 7 and passed the first time, I got a 74 in 2009. And yes Rob, I think you are correct - what you put in is what you get. I ate and slept the material for approx 5 weeks. The first two weeks I read the material my firm provided, the next 3 weeks I took about 100 - 150 question tests everyday. I also got an audio CD from your site to help reinforce what I was reading. So now the new firm I'm at is asking that I get my 66. Hopefully in about a week or so I will be an IAR! Oh yea... and I picked up the 66 audio as well, thanks for your knowledge Rob!!! :)