Tag Archives: Questions

Hi Everyone,

This next video blog covers the taxation of withdrawals from variable annuities. Enjoy!

Thanks for spending time with us. We hope you found it worthwhile.

—Securities Training Corporation


Taking a regulatory exam can be a stressful experience. However, if you know what to expect beforehand, it will not be a traumatic one.

The FINRA Regulatory Examination Committee has zero tolerance for cheating. It goes to great lengths to prevent it, and has fined and suspended associated persons caught cheating from working with a FINRA member.

When you arrive at the examination center, you will be asked for up-to-date, government-issued picture identification such as a driver’s license or passport. A locker will be provided for coats, purses, phones, and other belongings. The only possessions permitted in the testing room are identification and locker key.

You will be fingerprinted, scanned with a metal detector, and instructed to empty your pockets. When you enter the testing room, you’ll be provided with a basic calculator that does basic addition, subtraction, multiplication, division but no exponent capability, as well as writing materials. The materials are usually a fine-tip, dry-erase marker and some form of dry-erase board. It’s usually three sheets of the dry-erase paper on a key ring, so you may need to flip back and forth if you make notes.

People will be taking different types of exams. While the room will be quiet, some centers supply headphones for those who are easily distracted. Centers usually videotape their testing room, so expect to see cameras.

Before starting, you will be given a tutorial on how the system works, how to choose answers, and how to grade your exam. A few students have commented that the fonts and feel of the software seem dated but, aesthetics aside, the functions (e.g., mark for review) will be similar to your STC Practice Exams.

You are allowed restroom breaks during the exam. However, the exam timer does not stop. If you finish all the questions early, you are allowed to leave, although the time you save does not carry over to an afternoon session. Each time you take a break, you will be required to place your fingers in the scan and show identification.

There is a maximum 60-minute break between the two parts of the Series 7 Examination. During this time, you are permitted to leave the building. Most students don’t wander far, often returning before the time is up. The two parts are like two separate exams. You can’t go back to Part One to revisit the questions, and you don’t learn your final score until you complete the second part.

After you choose to grade the exam, it takes approximately 30 to 40 seconds for the computer screen to display your score. As you leave the testing room, the center will collect the calculator and writing materials and will give you a paper copy of your grade—hopefully a passing one.

For more information, go to https://www.prometric.com/en-us/Pages/home.aspx

Thanks for spending time with us. We hope you found it worthwhile.

—Securities Training Corporation


Continuing our series of videos about answering questions methodically; here’s a video about how to answer a Series 63/65/66 question. Click the link below to view it.

Thanks for spending time with us. We hope you found it worthwhile.

—Securities Training Corporation


Something a little different for today’s blog; a video about how to answer questions. Click the link below to view it.

Thanks for spending time with us. We hope you found it worthwhile.

—Securities Training Corporation

Tricky Question Episode 1

There are always some practice exam questions that students bring to our attention. These questions are generally confusing to them, even after reading the explanation. In this and upcoming posts, we’ll try to shed light on the more difficult exam questions we’ve written. If you have suggestions for future questions, let us know. Today we’re discussing a favorite from our Series 7 Course.

An investor who wishes to hedge a portfolio of preferred stocks would buy which TWO of the following options?

I.            Yield-based option calls

II.            Yield-based option puts

III.            Interest-rate option calls

IV.            Interest-rate option puts

A. I and III
B. I and IV
C. II and III
D. II and IV

The person who came up with Roman numeral questions deserves a spot in the test-writing hall of fame. This type of question is a very effective way to test your full understanding of a concept within the confines of a single question. Many students, however, dislike them with a passion.

The best way to approach them is to ignore the choices (a), (b), (c), and (d) at first and to focus on the Roman numerals (I), (II), (III), and (IV). Think about which numerals you feel may be correct and which ones may be incorrect. From there, you can usually eliminate choices and make a better decision or, in some cases, a better guess. For example, if you know that (I) is correct in the above question, you can eliminate choices (c) and (d), since neither choice includes (I).

As you analyze the stem of the question, you see that it states that an investor wishes to hedge preferred stock. This question requires that you know how preferred stock is priced—specifically, that its price is derived mostly from interest rates, just as with bonds. In general, preferred stock and bonds are much more alike than preferred and common stock. Preferred and bonds both pay fixed income. Both have a higher priority in the event of liquidation, and both prices move in the opposite direction of interest rates.

Remember, if interest rates are rising, preferred (or bond) prices are declining and vice versa. If an investor owns preferred stock (or bonds), she is concerned that the price of her shares will decline and interest rates will rise. To summarize, this investor needs to protect against (1) preferred stock/bond prices declining and (2) interest rates rising.

There are two types of options that will help protect the investor. The complicated part in answering the question is knowing that interest-rate options are price-based and yield options are yield-based. They’re sort of opposites of one another. Interest-rate options are really just bond options.* If you buy an interest-rate call, upon exercise you’re buying a Treasury bond. This is exactly how a stock option works. So, if you think the price of Treasury bonds will rise, buying an interest-rate call is a profitable strategy. This is why they’re called price-based options. In the question, though, we’re trying to profit (hedge against) when the price is falling, so we need to buy an interest-rate put option.** Now we’re closing in. Buying interest-rate puts is choice (IV), thereby eliminating choices (a) and (c).

*Which is why the term interest-rate options is a misleading name. They should’ve named them bond options.

**Buying options is typically the best hedge. Shorting options, while fun, is not a good hedge since the trader loses control if the option is exercised.

What about numerals (I) and (II), the yield-based options? Yield-based options are based on the yield. As a reminder, bond yields move in the same direction as interest rates. Investors who think yields or interest rates will rise should buy yield-based calls. This is why yield-based options are based on interest rates and yields.

How does an investor exercise these options? In theory, someone who buys a yield-based call, and then exercises it, would buy the yield. But, you can’t really do that. Those yields don’t exist tangibly like a bond exists. They’re just numbers.*** These options have some existential issues.

To work around the small issue of yields not existing, the exchanges have made them cash-settled. Cash-settled options are a lot like gambling. The buyer of a yield-based call, instead of buying anything, will simply receive money from the seller if yields rise. The amount he gets is simply the difference in the actual yield and the strike yield (i.e., the in-the-money amount).

Cash settlement has been a Pandora’s Box for financial markets, leading to things like this. Back to the question at hand, we need to hedge against interest rates (or yields) rising. So, the best option would be buying a yield-based call—numerals (I) and (IV) are correct, which is choice B. One down, 249 questions left to answer correctly for the regulatory examination.

*** I realize Treasury bonds are book-entry securities and aren’t really tangible either. In any event, the bond is much easier to buy conceptually than the yield is.

Thanks for reading; we hope you found it worthwhile.

-Securities Training Corporation