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Gordon Mitchell Series 7 Tutor

Advantages of Having a Tutor

  • Trying to pass your Series 7 exam is hard enough without the difficulties of finding the individual help you need to pass it.
  • Classroom settings where you're just one of many faces will
    only get you canned material and little individual help.
  • Virtual classrooms held over the internet are robotic, pre-programmed
    material that do not address your particular needs and difficulties.
  • Even over-the-telephone tutoring is out of touch, impersonal
    and doesn't allow a tutor to get to know the real you, or allow you to assess the qualifications of the person you're talking to.
  • Let's face it:  passing the Series 7 is too important to risk on a preparation strategy that will provide no real help in achieving your objectives.
  • Only professional tutoring  -  face-to-face and one-on-one  -  can
    answer your questions, determine your weaknesses and strengths
    and tailor the course of study to your individual needs.

Series 6 Investment Company and Variable Contracts Limited Representative

Many banks, bank-holding companies, boutique financial advisory firms, insurance companies and other financial services require their representatives to take the Series 6 examination.
Once you pass the Series 6 and the attendant state law exam (Series 63), your sponsor (employer) will register you with the SEC and FINRA as a Limited Representative.
While this does not confer the extensive responsibilities of a General Securities Representative (Series 7), nevertheless it does include the type of financial products that most financial service professionals offer to their clients:  mutual funds, variable insurance and variable annuity contracts.
The variable insurance and annuity products require that you also pass an insurance exam to be licensed with your State Insurance Commission.
In general the Series 6 examination is easier to pass than the Series 7.  It consists of 100 multiple choice questions, which must be completed in 2 hours and 15 minutes.

Series 7 Convertible Bonds

Convertible bonds are for those who can’t make up their minds whether to buy a bond or buy stock in a company.  Just kidding!  Nevertheless, it might be a good way to think about what convertible bonds really are as an investment vehicle.
All convertible bond questions on the Series 7 refer to “corporate” bonds, namely they are bonds issued by companies.  There are no such things as convertible Treasury, U.S. agency or municipal bonds.  There are convertible preferred shares, also issued by corporations, but we will not be discussing them at this time.
Similarities between Convertible and Non-Convertible Bonds
Just like any other corporate bond, when you buy a convertible you are buying debt (lending money to) a corporation at a nominal rate of interest, paid to you semiannually.  You pay par value ($1000 per bond) and expect to receive par back at maturity.
Differences between Convertible and Non-Convertible Bonds
 There are differences, however, between convertible corporate bonds and non-convertibles. You should expect to receive a lower nominal interest rate in return for the convertibility feature discussed below.  On the hierarchy of distribution of assets in case the company were to go bankrupt, a convertible normally ranks as a debenture or more often, a subordinated debenture .  Thus it is only above preferred and common shareholders.  Finally, even if you plan to hold your convertible until maturity and never convert it into stock, the market value of your convertible bond will fluctuate based on both the value of the company’s common stock and the general level of interest rates in the economy.
Convertibility Feature
 What intrigues people about convertible bonds is the fact that they have control over deciding when or if to convert the bond into a set number of shares in the company.  At the time the convertible bond is issued, a conversion price is set.  To determine the number of shares the bond can be converted into, just divide the price of the bond ($1000) by the conversion price.
So if the conversion price is $40, $1000 divided by $40 equals 25 shares per bond as detailed in example 1 below.
Example 1      
CP   =   Conversion Price   =   $40
Par Value of a Bond   =   $1000
Number shares bond may be converted into   =  $1000/$40   =   25
The number of shares is also known as the “Conversion Ratio” or CR.
On the Series 7 exam you will be given either the CP or the CR and asked to determine the other’s value.  To determine the CP when you are given the CR:
CR   =  25;  CP   =   ?
CP   =  $1000/CR    = $1000/25    =   $40
Secondary Market for Convertible Bonds
After the convertible bond is first sold, its value will be determined by the marketplace.  If the market price of the stock is below the conversion price, the bond itself is still worth $1000 at maturity.  Its market value will fluctuate inversely with interest rates just as all bonds do.  However, if the market price of the stock is higher than the conversion price, the price of the convertible bond will keep pace by staying at parity with the stock or, more likely, at a premium to parity.
Taking the example above, if the company’s common stock rose to $50/share, what would the convertible bond’s market price be at parity?  Since the bond can be converted into 25 shares, 25 times $50 equals $1250.  In other words, the bond that cost the investor par ($1000) to buy is now worth at least $1250 at parity with the stock.  More often it will be selling at a premium to parity, because it still carries the unused conversion feature.
If the bondholder expects the company’s common stock to rise significantly over time, the bondholder might take advantage of the potential future return on the stock by converting now rather than waiting to get just par ($1000) back on the bond at maturity.  The value of the bond is no longer just par, it is at least the price of the common shares multiplied by the number of shares it can be converted into.
Forced Conversion
 Convertible bonds are usually callable.  This means the company that issued them may redeem them in advance of their maturity date, generally during times when interest rates are falling and its debt can be refinanced at a lower prevailing rate.  This presents a convertible bond holder with a conundrum:  should she allow her bonds to be called or should she convert the bonds into shares in the company?
This situation is often presented in the form of a Series 7 question as in Example 2 below.
Example 2
 Sharon owns a convertible bond issued by XYZ corporation with a conversion price of $50.  XYZ’s common stock is currently selling for $57 per share.  XYZ is calling the bond in at a premium to par of 110 ($1100).  The bond market currently prices the bond at 112 ($1120).  Sharon asks her registered representative, Aaron, what she should do.  What should Aaron advise her?
a.)  Allow the bond to be called.
b.)  Convert the bond to shares of common stock.
c.)  Sell the bond in the secondary market place.
d.)  Hold the bond to maturity.
Option “d” can be eliminated, because it’s no longer a possibility.  The bond is being called now by the corporation and will never reach maturity.
To determine which of the remaining answers will provide Sharon the highest return, first determine the conversion ratio, CR.
CR   =  $1000/CP    =  $1000/50 =   20   =   number of shares per bond after conversion
The common shares are selling in the market at $57/share.  If she converts, Sharon will get a value of 20 x $57   =   $1140.  This is higher than what she would get from the corporation if she allows her bond to be called ($1100).  It is also higher than what she would receive by selling her bond outright in the secondary bond market ($1120).  So the best answer to the question is “b”:  convert the bond into shares.  Notice that the Series 7 exam will not take trade commissions into account when determining the right answer it is looking for.
Advantages and Disadvantages to the Company Issuing Convertible Bonds
Convertible bonds allow the company to issue debt (borrow money) at lower rates of interest than they would have to offer on nonconvertible debt.  However, if all the convertible bonds are converted to stock, this will increase the number of outstanding shares and thereby decrease the company’s earnings per share.  The equity for all stockholders will be diluted (decreased.)  This is the meaning of “fully diluted earnings per share,” which you will often see on a company’s income statement.  It does not mean that all convertible bonds have been converted.  It simply represents the effect on earnings per share (EPS) as if all the convertible bonds had been converted to common shares.
Effect of Stock Splits or Stock Dividends on Convertible Bonds
The conversion price and conversion ratio are guaranteed in the bond’s indenture and are not changed unless there is a change in the underlying stock, such as a stock split or a stock dividend.  The bond’s convertibility feature can not be diluted or diminished by such events.  Therefore if there is a 2 for 1 stock split by the company, doubling the number of common shares but cutting the price of those shares by half, there is no change to the overall value of those shares.  Nor is there a change to the rights of the convertible bondholders.  In this case, the conversion price (CP) is cut in half and the number of shares per bond (CR) doubles.  A stock dividend will have a similar affect on the conversion feature by decreasing the CP and increasing CR by the percentage increase in number of outstanding shares represented by the stock dividend.  Please see Example 3 below for a more detailed explanation.
Example 3
 XYZ company declares a stock dividend of 1 share for every 5 owned to shareholders of record.  This represents an increase of 20% to the number of shares outstanding after the record date.  For every 5 shares the stockholder used to own, she now owns 6 shares.  However, the price of each share will drop by the same amount, 20%, on the ex-dividend date.  If the shares had been trading for $10/share before, they will now begin trading at $8/share at the opening on the ex-dividend date.
The convertible bondholder’s interest is protected against dilution in such an event:  his CP decreases by 20% and his CR increases by 20%.  Let’s say that the conversion price (CP) was originally $50.  This would give the bondholder the right to convert the bond into 20 shares ($1000 divided by $50 equals 20 shares.)  After the stock dividend takes effect, the CP would drop by 20% to $40 per share and the CR would increase by 20% to 25 shares per bond.
$50 x 20%  =  $50 x .20  =  $10
$50 - $10  = $40
CR  =  $1000/$40 =  25 shares per convertible bond
Notice that the total value of the conversion feature has not changed:
Before the stock dividend the convertibility feature’s value is 20 x $10/share  =  $200.
After the stock dividend the convertibility feature is worth 25 x $8/share    =  $200.
(Remember, this is just an example; obviously it would not be in the best interest of the convertible bond holder to convert his bond to shares when the market price of the shares is trading at such a low level.)

What is an Annuity?

An annuity is the OPPOSITE of life insurance !
  •  Both are bets you make with an insurance company, but they are opposite sides of the bet. With a life insurance policy you are betting that you will not live past your actuarial mortality date*.  With an annuity you are betting that you will live well past that date.  
  • With a life insurance policy you pay a monthly premium so that your heirs will get a lump sum payout when you die.  With an annuity, you pay a lump sum up front and get a monthly payout for the rest of your life.  If you are right, you may well get much more back over your lifetime than your original lump sum.
  • When you are young and employed and have a young family, life insurance is a way of providing income to your family even if you are not around to earn a salary.
  • When you are older and the kids are grown and out of the house, it may be time to reverse your bet.  Plunking down a lump sum for an immediate annuity means you will get a monthly check for the rest of your life whether you continue working or not.
  • When you are older and your assets have grown, they may well exceed the value of your life insurance policy.  Moreover, premiums for term-life insurance become prohibitively expensive the older you get.  Do you still need to keep paying for that life policy or do you want to get paid just for living a hopefully long and fruitful life?
* Your “actuarial mortality date” is that point in the future when half the people your current age and gender will already be dead.

How to Pass the Series 7 Exam for Financial Professionals

  1. Read the study material.  I recommend the Series 7 manual and practice exams from Securities Training Corp. at
  2. Plan to spend at least 20 hours a week for 4 to 6 weeks absorbing and understanding this material.  If devoting this much time is unappealing for you, you may want to reconsider a career in financial services.
  3. Take the practice exams.  Score 85% or better on the final, closed-book quizzes.  This should give you what Warren Buffett calls "a margin of safety" for passing the actual Series 7 test.
If you still find difficulty passing the Series 7, contact me at
Best of luck! Gordon Mitchell Series 7 Tutor
Santa Clara Series 63 Tutor Call Gordon at 415 729-3704 or Click Here to Email Santa Clara Series 7 Tutoring
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