Friday, January 29, 2010

More Muni's in the Real World

I've posted on this theme before, but I'm constantly amazed how much of a connection there is between my daily life and municipal bonds. Across the street from this office sits an old brick industrial facility that was supposed to be turned into a townhouse/condo development. Unfortunately, the developers borrowed $15 million but sold only 1 unit, and now the property sits in foreclosure, owned by a very unhappy bank. So, the Park District, with land that presses right up to the property, would like to use the building for offices, conference rooms, exercise rooms, and also some green space after tearing down part of the structure. They need $6 million to acquire the property and, therefore, want to issue $6 million of municipal bonds. Next Tuesday, Forest Parkers like me will vote yea or nay to allow the Park District to raise our property taxes slightly in order to create the money needed to retire a $6 million bond issue. I'm kind of tired of seeing the old, useless structure across the street, and green space is a rare commodity in this densely-packed community. I plan to vote "yea." Senior citizens will probably vote "no," based on their argument that "we don't use it; why should we pay for it?" Nice to see how much today's seniors care about the youth of their community--as if an extra $75 a year in property taxes is really going to impact anyone.

On another note, I see that the Cubs are threatening to move their spring training facility from Arizona to Florida. I invite you to read this article from the Bond Buyer yourself. As before, you will see that municipal bonds impact our daily lives, far outside the scope of the Series 7 Exam. The Bond Buyer article is at:

Using social networking sites

It's a brutally cold 5 degrees in Chicago this Friday morning and I'm doing my usual routine of visiting the FINRA website to see what's new. I'm not surprised to find a Notice to Members concerning the use of social networking websites by registered representatives. Obviously, a registered representative can now easily post stock and bond recommendations on his "wall" at Facebook, or--even scarier--post them on all of his friends' walls. Or, maybe he starts a fan page in which friends can "become a fan of Oracle 6% convertible preferred stock," although I'm not sure how many devotees he'd find for that one.

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 (

Thursday, January 28, 2010

Convertible bond question

The Series 7 exam does not necessarily ask questions the way that you or your practice questions assumed. For example, most practice questions on convertible bonds involve the mathematical calculations and relationships involved. You finally get used to dealing with "convertible at 50" and "parity," and you start to feel confident that you're ready for questions on convertible bonds or convertible preferred stock. When you get to the exam center, however, maybe you get a fun question like this one:

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

What about the new Roth IRA rules?

Many Series 7 candidates have been sending emails asking if the Series 7 exam will be testing the new Roth IRA rules for 2010. The most accurate answer is this: nobody knows.
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

Workin' outside the firm--hey, it's MY business!

Many agents don't understand how much control their broker-dealer actually has over them. Many think they can maintain investment accounts all over the place that their firm knows nothing about, for example. Others think they can call their clients to interest them in some real estate investment they're cooking up with their brother-in-law. How would you answer a very likely exam question such as the following?

When an agent of a broker-dealer would like to give harpsichord lessons for compensation just two times per week
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

EXPLANATION: there is some hair-splitting going on here. Does the broker-dealer need to grant written permission? No. Can they tell you not to do it? Yes. Anytime you want to work outside the firm for compensation, notify your supervisor in writing.


Tuesday, January 19, 2010

Net Asset Value

Net Asset Value in a mutual fund seems to annoy a large number of Series 7 candidates, so let's take a closer look. Here is a rather difficult practice question on the concept:

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

It's a book

Broker-dealers often provide study materials "free of charge" to those taking the Series 7. Many exam candidates are unhappy with what they've been provided, or they feel they could use more clarification of key points. Some people just want to read the Series 7 material in a language they are more familiar with--English.

Remember that you can still buy the Pass the 7 book at the link below, even if your firm already provided you with materials. I'm not even implying that there's something wrong with the other vendors' materials. It's just that when you're studying for something as massive and difficult as the Series 7, you can probably use all the extra help you can get.

Since most Series 7 candidates are on a tight budget, I can help you save 21% with this coupon code: blog10. To check out and maybe buy the Pass the 7 book, please click on:

Can I reschedule my exam?

Exam candidates often get confused about if and how they can reschedule their exam. Now, if your firm says you can't reschedule, then that's the end of that issue. But, if you have the flexibility to take the test only when you feel ready to pass it, you can definitely reschedule your exam by telephone or through the testing center's website. Why would you reschedule your test? How about because you would rather push it back 1 week yourself than have it pushed back 30 days through a failing grade. Right? While it's nice to "get it all over with," it's a bad call to take the test unprepared and end up failing and having to wait 30 days. It's like speeding to get to an appointment--if you get in a wreck or get a ticket, you won't make the appointment at all. We will have a GoNoGo exam soon for Series 7--check the home page and look for "Am I ready to take my exam?" These scores will give you an idea of your readiness. Or maybe you already know you're not quite ready. If so, you can reschedule without losing your testing fees if you do so by noon two business days before your test. As FINRA just sent to me by email, you can reschedule as follows:

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

Completion of a securities transaction

I was doing some exciting research for our Pass the 65 ExamCram questions and ran into this concept buried in an SEC release that was referred to by a financial planning textbook--yes, my social life really can't get any more exciting at this point. In any case, I came up with this possible Series 7, 65, or 66 question:

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

Figure it out

Far too many license exam candidates labor under a misconception about the exams; they think they are supposed to know the answer as soon as they read the question. Unfortunately, for most questions, your job is to figure it out. For example, take a look at the following:

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.