If you’re studying for the Series 65, Series 7, or another securities licensing exam, try this evidence-based study strategy. Continue reading
Solomon Exam Prep’s learning system is built on understanding how people learn. Solomon Exam Prep is always looking for new ways to help our students.
Research from Dr. Tania Lombrozo of UC Berkeley, published in the journal Trends in Cognitive Science, shows that explaining a new concept to another person is an enormously helpful learning technique. When you explain an unfamiliar concept to another person, your brain makes crucial learning connections. However, many people do not have a person around them that is ready to listen to their new knowledge. Thus, Dr. Lombrozo recommends self-explanation, which is the practice of explaining concepts to yourself in order to better understand them.
Why does explaining work?
Dr. Lombrozo found that the positive effects of self-explanation can be attributed to the generalization process. Explaining requires you to put new information in the context of “prior beliefs,” which makes you generalize the information. In doing so, you are forced to pick out what is most necessary for understanding the concept. In thinking about how to explain something, you in fact learn more about the thing itself!
Dr. Lombrozo describes an experiment by psychologists Amsterlaw and Wellman that demonstrates the power of explaining in understanding. In Amsterlaw and Wellman’s experiment, they administered logic tests to children under various conditions. During the course of the experiment, the children were split into groups. One group would answer, and then they would be asked to explain the correct answer once it was revealed. A comparison group did the same, but only for half the problems. The third group was a control group and gave no explanation at all. According to Amsterlaw and Wellman, “children in the explanation condition significantly outperformed the comparison and control groups….” In other words, explaining increases understanding.
How to use this strategy for licensing exams:
What does this mean if you’re studying for the Series 65 or the Series 7 or some other securities licensing exam? Solomon Exam Prep suggests finding someone in your life who will listen to you explain topics from your securities exam prep. The person you choose does not need to have any knowledge of securities. The person just needs to be a good listener; even better, someone who will ask questions. What if you don’t have anyone who can do that for you? Well, as Dr. Lombrozo showed, the practice of self-explanation is also helpful and will increase your understanding of the material you are trying to learn.
Other recommended Solomon study strategies include:
Listen to the Solomon audiobook while you read the Solomon study guide.
As you read the Solomon study guide and watch the Solomon video lectures, take notes by hand.
When practicing in the Solomon exam simulator, read and re-read the question at least twice.
If you answer a question correctly, explain to yourself why it was correct before reading the question rationale.
If you answer a question incorrectly, read the rationale carefully. Explain to yourself what the right answer is, and why. Write down the explanation in your notes.
Study with a partner. Trade off testing each other on concepts and asking for an explanation.
Solomon Exam Prep has helped thousands pass their securities licensing exams, including the SIE and the Series 3, 6, 7, 14, 22, 24, 26, 27, 28, 50, 51, 52, 53, 54, 63, 65, 66, 79, 82 and 99.
For many when choosing bonds the most important factor is the tax implications. Knowing the after-tax yield and tax-equivalent yield calculations is critical. Continue reading
Bonds can be nice, reliable investments. Pay some money to an issuing company or municipality, receive interest payments twice a year, and then get all of your original investment back sometime down the road. Sounds like a plan.
But which bonds are best for a specific investor? There are many factors for bond investors to consider when choosing which bond to buy, but for many the most important is the tax implications of investing in one bond instead of another. This concern is most prominent when an investor compares a corporate bond to a municipal bond. For reference, a corporate bond is one issued by a corporation or business, while a municipal bond is one issued by a state, city, or municipal agency.
Comparing the tax implications of these bonds is important because the interest payments that investors receive from municipal bonds are typically not taxed at the federal level. Conversely, interest payments on all corporate bonds are subject to federal taxation. This means that someone in the 32% tax bracket will have to give Uncle Sam 32% of his interest received from a corporate bond, while he will not give up any of his interest received from a municipal bond. Additionally, an investor does not pay state taxes on municipal bond interest if the bond is issued in the state in which the investor lives. Corporate bond interest, on the other hand, is always subject to state tax.
interest payments taxed federally
interest payments subject to state tax
interest payments not federally taxed
interest payments not taxed by state if issued in state local to investor
For these reasons, when comparing a corporate bond to a municipal bond, understanding the after-tax yield and the tax-equivalent or corporate-equivalent yield is essential. This is true both for investors and for those who will be taking many of the FINRA, NASAA, and MSRB exams. So let’s look at how to calculate those yields.
First the after-tax yield. The after-tax yield tells you the amount of a corporate bond’s annual interest payment that an investor will take home after accounting for taxes he will be assessed on that interest. Once that amount is known, the investor can compare it to the yield he would receive from a specific municipal bond and see which potential investment would put more money in his pocket. When calculating the after-tax yield, start with the annual interest percentage (a.k.a. coupon percentage) of the corporate bond, which represents the percent of the bond’s par value that an investor receives each year in interest. For instance, a corporate bond that has a $1,000 par value and an interest rate of 8% will pay an investor $80 dollars in annual interest ($1,000 x 0.08 = $80). You then multiply the coupon percentage by 1 minus the taxes an investor will pay on the corporate bond that he will not pay on the municipal bond that he is considering.
This is where it sometimes gets tricky. What taxes will an investor not pay when investing in a municipal bond that he will pay when investing in a corporate bond? Remember that for just about all municipal bonds, investors do not pay federal tax on interest received.
The formula for after tax yield is:
After-tax yield = Corporate Bond Annual Interest Rate x ( 1 – Taxes Investor Does Not Pay By Investing in Municipal Bond)
On the other hand, an investor always pays federal taxes on interest received from a corporate bond. Additionally, an investor does not pay state taxes on interest payments from a municipal bond issued in the state in which the investor lives.
On the other hand, an investor always pays state taxes on interest received from corporate bonds. So if you see an exam question in which you need to calculate the after-tax yield of a corporate bond to compare it the yield on a municipal bond, you will always subtract the investor’s federal income tax rate from 1 in the equation. You will also subtract the investor’s state tax rate from 1 if the municipal bond is issued in the investor’s state of residence.
Seems simple, right? Here’s a question to provide context:
Marilyn is a resident of Kentucky. She is considering a bond issued by XYZ Corporation. The bond comes with a 7% annual interest rate. Marilyn is also interested in purchasing municipal bonds issued in Ohio. If Marilyn has a federal tax rate of 28% and Kentucky’s state tax rate is 4%, what is the after-tax yield on XYZ’s bond?
To answer this question, begin with the interest rate on the XYZ bond, which is 7%. Then subtract from 1 the taxes Marilyn will not pay if she invests in the municipal bond in question. She will not pay federal taxes on the municipal bond interest, so you would subtract 28%, or .28. However, because Marilyn is a resident of Kentucky and the municipal bonds she is considering are issued in Ohio, she will pay state taxes on the bond. That means you would not subtract her state tax rate (0.04) from 1. After subtracting .28 from 1 to get 0.72, you multiply that amount by the 7% coupon payment. Doing so gives you a value of 5.04 (7 x 0.72 = 5.04%). This means that the interest amount she would take home from the XYZ bond would be equivalent to what she would receive from a municipal bond issued in Ohio that has a 5.04% interest payment. If she can get a bond issued in Ohio that has a higher interest payment than 5.04%, she would take home more money in annual interest payments than she would from the XYZ bond.
The second approach an investor can take to compare how a potential bond investment will be affected by taxation is to calculate the tax-equivalent yield (TEY). This calculation is also known as the corporate-equivalent yield (CEY). The TEY/CEY measures the yield that a corporate bond will have to pay to be equivalent to a given municipal bond after accounting for taxes due. To calculate this yield, you take the annual interest of the given municipal bond and divide it by 1 minus the taxes the investor will not pay if she invests in the municipal bond that she would pay if she invested in a corporate bond.
Here’s the formula for tax-equivalent yield:
Tax-equivalent yield = Municipal Bond Annual Interest Rate / (1 – Taxes Investor Does Not Pay By Investing in Municipal Bond)
When determining what tax rates to subtract from 1 in the denominator, the same principal as described above applies. That is, the investor will not have to pay federal tax on the municipal bond, so her federal rate is always subtracted from 1. The investor will also not have to pay state tax on the bond if it is issued in the state in which she lives. If that is the case, the investor’s state tax rate should also be subtracted from 1. However, if the investor lives in a different state than the state in which the bond is issued, she will have to pay state taxes on the interest payments. In that case, her state tax rate would not be subtracted from 1.
Here’s another question to provide context.
Franz, a resident of Michigan, has purchased a Michigan municipal bond that pays 4% annual interest. If his federal tax bracket is 30% and the Michigan state tax rate is 4%, what interest rate would he need to receive on a corporate bond to have a comparable rate after accounting for taxes owed?
To answer this question, begin with the interest rate on the Michigan municipal bond, which is 4%. Then subtract from 1 the taxes that Franz will not pay on that bond that he would pay if he invested in a corporate bond. He wouldn’t pay federal taxes on the municipal bond interest, so you would subtract 0.30 from 1. Additionally, since the bond is issued in Michigan and he is a Michigan resident, Franz will not pay state taxes on the bond. So you subtract Michigan’s state tax rate of 4%, or 0.04, from 1 as well. After subtracting 0.30 and 0.04 from 1 to get 0.66, you divide that number into the 4% municipal bond annual interest. Doing so gives a value of 6.06 (4 / 0.66 = 6.06). This means Franz would need to find a corporate bond that pays 6.06% in annual interest to match the amount of interest he will take home annually from the Michigan municipal bond after accounting for taxes.
Many people are confused by the concepts of the after-tax and tax-equivalent yields. But you don’t have to be one of them. Just follow this simple approach and any questions you see on this topic will not be overly taxing.
Meet the newest addition to Solomon Exam Prep’s lineup of free Sample Quizzes: the SIE Sample Exam! Visit the Solomon website to try it out. Continue reading
Meet the newest addition to Solomon Exam Prep’s lineup of free Sample Quizzes: the SIE Sample Exam! Like all Solomon Sample Quizzes, the SIE Sample Exam features questions from our industry-leading Online Exam Simulator. Questions are written by Solomon content experts, who are experienced in both investment education and the process of adult learning.
But unlike other Solomon Sample Quizzes, the SIE Sample Exam is a FULL exam – it contains 75 questions, just like the real FINRASIE exam – giving you an even better idea of what the actual exam is like. You will encounter easy, medium, and difficult questions so that you can more easily gauge your current knowledge of SIE content.
All Solomon Sample Quizzes and Exams also provide instant feedback for each answer, with a full rationale to help you understand the WHY behind the what. Plus, you get a report at the end detailing your results and giving you the opportunity to review all the questions.
Visit the Solomon website here to try out the SIE Sample Exam and explore free samples of quizzes for 21 different exams.
SPACs have grown by leaps and bounds in recent years, and the growth is only accelerating. What will this mean for regulations and the Series 79 exam? Continue reading
It sounds like a securities-industry riddle: what do you call a blank check company with no hard assets that holds a multimillion dollar IPO? But the answer is very real: SPACs (special purposes acquisition companies) are an alternative to traditional IPOs that have exploded in popularity.
What’s a “blank check company?” A blank check company is an exchange-listed shell company that, according to the SEC, has “no specific business plan or…its business plan is to engage in a merger or acquisition.”
The purpose of a SPAC is to raise money to acquire a privately held company. Think of it as crowdfunding on a massive scale. First, the SPAC sells shares of itself in an IPO. Then it uses the IPO proceeds to fund a merger between itself and a target company. When the merger is complete, the SPAC’s shareholders become shareholders in the target company. Investors buy SPAC shares based on their confidence that the SPAC’s management will complete the merger, and the anticipated value of the shares after the merger.
SPACs have grown by leaps and bounds in recent years, and the growth is only accelerating. The amount raised by SPAC IPOs in 2020 more than quadrupled the amount they raised in 2019. According to Reuters, the total value of SPAC mergers in 2021 has already exceeded the total size of SPAC mergers for all of 2020.
What does this mean for regulations?
As investor excitement around SPACs has heated up, there are indications that the SEC is beginning to take a closer look at this new kind of IPO. On March 10th, the SEC issued a warning against investing based on celebrity involvement with a SPAC. Celebrities with high-profile ties to SPACs include A-Rod, Shaquille O’Neal, Serena Williams, and former Speaker of the House Paul Ryan. Acting SEC Chair Allison Herren Lee recently warned of “more and more evidence on the risk side of the equation for SPACs as we see studies showing that their performance for most investors doesn’t match the hype.”
While none of this guarantees that new rules for SPACs are around the corner, it does make it more likely that FINRA’s Series 79 investment banking exam may begin to include mention of SPACs. They are a topic that investment bankers are increasingly likely to encounter in practice, and therefore are increasingly likely to be viewed as fair game for the exam.
Solomon Exam Prep is ahead of the curve with new material in our Series 79 Study Guide. Series 79 customers can find material on SPACs now included in the online edition of Solomon Study Guide.
Potentially testable points about SPACs include:
SPAC are formed by “sponsors,” commonly institutional investors or high net worth individuals, who are compensated with both a portion of the IPO proceeds, as well as an equity stake in the SPAC of up to 20%.
SPAC’s typically avoid committing to merge with a specific company, even if the SPAC was formed with the intention of targeting that company. The SPAC’s management may respond to changing market conditions by choosing a different target, subject to approval from the SPAC’s shareholders.
After a SPAC goes public, its shares trade freely on exchanges even before it completes a merger.
A SPAC must hold at least 85% of proceeds from its IPO in an escrow account.
The SPAC commits to return investor funds if it fails to complete a merger within a specified timeframe.
As a blank check company with no business operations of its own, a SPAC cannot take advantage of certain options available to more established securities issuers. For example, a SPAC is not permitted to make an electronic version of its road show presentation.
Solomon Exam Prep will continue to follow industry trends and how they affect your licensing exams.
Solomon Exam Prep has helped thousands pass their securities licensing exams, including the SIE and the Series 3, 6, 7, 14, 22, 24, 26, 27, 28, 50, 51, 52, 53, 54, 63, 65, 66, 79, 82 and 99.
This question is relevant to the Series14, 79, 82, and SIE exams.
A research analyst who works for an underwriter that participated in an IPO may not publicly discuss or write a research report about the company until __________________.
A. 30 days after the registration is filed
B. 20 days after the securities are issued
C. 10 days after the date of the IPO
D. 30 days after the date of the IPO
Correct Answer: C – 10 days after the date of the IPO
Explanation: A research analyst who works for an underwriter of an IPO must not discuss or write a research report about the company for 10 days after the IPO. This 10-day period of silence is called a ‘quiet period.’ There is no quiet period for EGCs (emerging growth companies).
To explore free samples of Solomon Exam Prep’s industry-leading online exam simulators for the SIE, Series 14, Series 79, Series 82, and many more exams, visit the Solomon website here.
This question is relevant to the Series7, 14, 51, 52, and 53 exams.
MSRB Rule G-38 states that a broker-dealer may not pay any person to solicit municipal securities business on its behalf who is not an affiliated person of the firm. For the purposes of the rule, an affiliated person is:
A. Any person who works for the firm
B. Only a partner, director, or officer of the firm
C. Only a registered employee of the firm
D. Only an unregistered clerical or ministerial employee of the firm
Correct Answer: A – any person who works for the firm
Explanation: An affiliated person is anyone who is a partner, director, officer, employee, or registered person of the broker-dealer.
For those planning to sit for the National Commodity Futures Exam, or Series 3, FINRA is now offering candidates the option to take the exam online via Prometric’s ProProctor platform. Continue reading
For those planning to sit for the National Commodity Futures Exam, or Series 3, FINRA is now offering candidates the option to take the exam online via Prometric’s ProProctor platform.
Since mid-2020, FINRA has offered online delivery of certain securities exams via the ProProctor remote service, allowing you to choose where and when to take your exam.
The ProProctor platform features an easy-to-use interface and 24/7 proctor support for a smooth test-taking experience. But it’s a good idea to be aware of the technical and security requirements before sitting for your exam remotely.
In addition to the Series 3 and other NFA exams, these exams can be taken online: the Securities Industry Essentials (SIE), Series 6, Series 7, Series 63, Series 65, and Series 66 exams.
On December 22, the SEC announced a major rule change that it hopes will clarify what investment advisers can and can’t do when it comes to marketing their services. Continue reading
On December 22, the SEC announced a major rule change that it hopes will clarify what investment advisers are permitted to do when it comes to marketing their services.
The SEC cited the need to adapt its rules to changing communications technology. “The marketing rule reflects important updates to the traditional advertising and solicitation regimes, which have not been amended for decades, despite our evolving financial markets and technology,” said SEC Chairman Jay Clayton in announcing the overhaul.
The SEC’s current rules about advertisements and paying for client referrals will be consolidated into a single rule. Paying a third party to solicit new clients will now be considered a form of advertising, as will paid testimonials and endorsements and some one-on-one communications with clients.
Currently, each of these activities is subject to a separate set of requirements. By bringing them under the definition of advertising, the new rule replaces this complex system with a set of six broad principles that all forms of IA advertising must adhere to:
No untrue statements or omissions of material facts
No unsubstantiated statements
No statements that imply something untrue or misleading
When the benefits of the IA’s services are discussed, there must be a fair and balanced discussion of material risks
“Anti-cherry picking”: the IA must present its track record in a fair and balanced way
No advertisements that are otherwise materially misleading (intended as a “catch-all provision” for misleading advertising not covered above)
The rule change is expected to take effect sometime in the spring of 2021 and will affect the Series 65 and Series 66 exams.
This question is relevant to the SIE, Series 6, 7, 22, 24, and 82 exams.
Which of the following people would be considered a specified adult?
A. A 16 year old with autism
B. A 30 year old
C. A 60 year old with a heart condition
D. An 18 year old in a coma
Correct Answer: D
Explanation: A specified adult is a natural person age 65 and older or a natural person age 18 and older who the member firm reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.
This question is relevant to the Series 6, 7, 14 and 79 exams.
Which of the following is not typically part of an underwriting agreement?
A. Description of the per-share underwriting spread
B. Description of a Greenshoe option
C. Terms between syndicate members and selling group dealers
D. Terms under which the underwriter can terminate the contract
Correct Answer: C
Explanation: The underwriting agreement, which is typically signed the evening before or the morning of the effective date of a securities issue typically includes the per-share underwriting spread, an over-allotment (Greenshoe) option if granted, and the underwriter’s termination rights. It also is the document that contains the public offering price or a formula to derive it.