Friday, January 29, 2010
Point is, broker-dealers have to either supervise or pre-approve a registered representative's communications on social networking sites or blogs. I hadn't actually thought of it until just now, but a blog post is "static" and, therefore, considered to be advertising. Advertising has to be pre-approved by a principal, which could really slow down your blog posts, especially if you continue to promote various stocks, mutual funds, or variable annuities. And, your recommendations have to be suitable for everyone who receives them, which seems to open a huge can of worms for the compliance department.
The FINRA notice is at:
It's very easy to read, as it's presented mostly in Q and A format. Enjoy, and study hard. The Series 7 is always looking to flunk 1/3 of all people sitting down to take it. Your job is to end up in the other 2/3s. And, there is still about 2 hours in which you can sign up for today's Friday Free Broadcast at 11 AM Central on TAXATION. See the home page under "Get Free Stuff" to sign up (http://www.passthe7.com/)
Thursday, January 28, 2010
When should a convertible bondholder be advised to convert her bonds to the underlying common stock?
A. when the bonds trade above parity
B. generally, under no circumstances
C. when the market for the common stock loses liquidity
D. when the bonds trade for less than the underlying stock net of commissions
See, this actually has very little to do with numbers or calculations. Suddenly you realize that all that time you spent dividing by the conversion price and figuring parity is only loosely connected to this question. In other words, welcome to the Series 7. Time to start thinking on your feet a little bit. What you have to know is that there is no reason to convert a convertible bond or preferred stock unless the prices between the convertible security and the underlying stock get "out of whack." If the bond trades at parity or above, the investor enjoys the higher market price. If the bond trades for less than the underlying stock--even after commissions paid to do the trade--investors might wish to convert to exploit the "arbitrage opportunity."
So, don't allow yourself to focus on just one narrow aspect about, for example, convertible bonds. Don't obsess over the conversion ratio and parity without also knowing that convertible bonds pay lower rates of return and are less sensitive to interest rates, etc. Calculations are not the focus of the test--being able to show your understanding of concepts is what the exam is usually after.
Monday, January 25, 2010
Why not? Because nobody ever knows what the Series 7 is going to ask. There are companies out there who will give you a definitive answer here, and there are companies like Pass the Test who prefer to tell you the truth--nobody knows.
If the test does ask a question requiring you to know the peculiar situation concerning Roth IRAs in 2010, this is what you would need to know:
- Income limits still apply and prevent "high-income" people from making a contribution
- The only change is that "high-income" people can do a Roth conversion by paying tax on all the money in their Traditional IRA account and making it a Roth account
That's all that's happening this year--if you want to convert a Traditional IRA to a Roth IRA, you can do that this year regardless of your income level. If you want to add new money to your Roth IRA, you will be prevented from doing so if you reach a certain income level that is one set of numbers for single filers and another for married couples filing jointly. What are those numbers? Your firm has them somewhere, and we do not think those numbers are testable. But, again, nobody really knows for sure what is "testable" and what isn't. That's just the sort of folks we deal with when taking the Series 7 exam. They do whatever it takes to flunk about 1/3 of all test takers on any given day. Don't let the wisenheimers put you into that bottom 1/3.
Thursday, January 21, 2010
A. the employing broker-dealer may not restrict or prohibit this activity
B. the employing broker-dealer must grant written permission
C. the agent must provide prior written notification to the employing broker-dealer
D. the agent must provide prior written notification to the broker-dealer if compensation exceeds $100
Tuesday, January 19, 2010
The Pacesetter Equity Income Fund holds large positions in exactly 10 common stock issues. This week 5 of the holdings distributed dividend payments of $10,000 each. Therefore, which of the following statements is true?
a. the NAV remains unchanged if proportionally more purchase orders come in versus redemptions
b. the NAV remains unchanged due to dividend distributions
c. the NAV will rise unless market values decline by more than the dividends distributed
d. the NAV remains unchanged unless redemptions outweigh purchase orders for the fund shares
EXPLANATION: NAV is figured before anybody buys or sells shares of the fund on a particular trading day. The buyers are not bidding competitively on a fixed number of shares--the fund creates new shares for the buyers and converts the sellers' shares to an equal amount of cash. Purchases and redemptions have no effect whatsoever on NAV. On the other hand, if $50,000 of cash money comes into the mutual fund portfolio, that makes the assets of the fund rise. The only way the NAV could go down that day is if the market values of the securities dropped by more than $50,000.
Thursday, January 14, 2010
If appointment is scheduled for Monday, cancellation must be made no later than noon on Thursday of the preceding week. If the appointment is scheduled for Tuesday, cancellation must be made no later than noon on Friday of the preceding week. Etc.
In other words, they made it slightly more convenient than in the olden days, when they counted 48 hours before the time of your exam; now it's just by noon two business days before your test, no matter what time it starts.
Tuesday, January 12, 2010
When does the SEC consider that a securities transaction has been "completed"?
A. when the prospectus has been received
B. when a registered representative completes the order ticket and submits it to the wire room
C. when the customer gives oral authorization for the terms of the order
D. upon settlement
EXPLANATION: a securities transaction has been "completed" when it settles/clears, at which point payment has been made, and the securities have been delivered. An investment adviser, for example, must disclose that it intends to act in a 'principal' capacity on a customer transaction and get the customer's consent no later than completion of the transaction, which is settlement. Settlement is usually T + 3 business days.
Saturday, January 9, 2010
Parents often use zero coupon bonds such as Treasury STRIPS to fund future educational needs. Which of the following is an inaccurate statement of such investments?
A. they lock in a rate of return for the life of the bonds
B. taxation is deferred until maturity
C. their market price volatility is higher compared to interest-paying debt securities
D. they require lower capital commitments
Maybe you already know the answer, but your approach should be to take each choice and try to eliminate it--the choice you can't eliminate must be your answer. Also, it helps to remember that you're eliminating the three TRUE statements in this one. Right? Ok, so do zero coupon bonds lock in a rate of return for the life of the bond? Don't try to picture an imaginary flash card here--ask yourself how zero coupons work. Why are they called "zero coupon" bonds in the first place? Because they make exactly zero coupon payments--therefore, the investor does not reinvest coupon payments at varying rates along the way (reinvestment risk), so I guess the return is "locked in for the life of the bonds." See how much thought it can take to eliminate just one answer choice? Good--two more need to be eliminated, and then we're done. Taxation is deferred until maturity--is that true? Many people have memorized this, but even if so, don't choose this answer yet. Not until you eliminate the other two. Put this one on hold--it looks good, but maybe one of the other choices looks even gooder. What about the "market price volatility," does that make sense? Well, if you remember all that we've said about "duration" and how zero coupons have high "durations," you know it's true. If you don't remember it, figure it out--why would their price be volatile? Probably because there's no cash flow being paid to make the investor feel better about holding the thing. That's true, so we eliminate it, and we sit 50-50 at this point. Either B or D is going to be our answer--getting tired and frustrated? Suck it up, people--you have 260 questions to answer on your Series 7 exam. Okay, Choice D says that zero coupon bonds somehow "require lower capital commitments." And here is where we separate those who will pass the first time and those who might pass on their second or third attempt. The candidates who get frustrated now and start squirming like a little kid have little chance of getting it right. So, take a deep breath and figure it out. Why would the zero coupon require a lower capital commitment? Well, how are they purchased? At a deep discount to the par value--aha! If you can buy $100,000 par value of STRIPS for just $50,000 or $60,000, I'd say that represents a "lower capital commitment," whether I've ever thought of it that way or not. Choice D is eliminated, along with Choice A and Choice C. What's the right answer? The one that is not A, C, or D.