Question Patterns and Exam Math

The templates

Nearly every question is one of these.

The definition question. 'Which of the following best describes X?' Fastest to answer and worth banking quickly.

The classification question. 'Which of these is a leading indicator?' or 'Which is an exempt security?' These reward list-memory, and the lists in this course's takeaways are exactly them.

The calculation question. Options profit and loss, margin, yields, sales charges, rights valuation, taxable equivalent yield. Covered below.

The suitability question. A customer profile plus four products. Work objective, horizon, tax status, risk — in that order.

The 'which is NOT' question. Read the stem twice; the single most expensive error on this exam is answering the affirmative version of a negative question. Underline the NOT, EXCEPT or LEAST on your scratch paper.

The sequence question. 'Place these in order' — liquidation priority, the dividend dates, the flow of funds, the underwriting spread components, the account opening steps. Every one of those sequences appears in this course's takeaways.

The two-part conditional. 'If the customer does A, what happens to B?' — the SMA and margin questions live here, and the technique is to write the account out rather than reason in your head.

The rule-threshold question. A number: 25 retail investors, 15 days, $2,000, six years, 10 business days, 30 calendar days. These are pure recall and they are free marks if you have the numbers.

The calculations to automate

Drill these until they take under thirty seconds each.

Options, long positions. Maximum loss is the premium. Breakeven is strike plus premium for a call, strike minus premium for a put. Maximum gain is unlimited for a call, strike minus premium for a put.

Options, short positions. Maximum gain is the premium. Same breakevens. Uncovered call loss is unlimited; short put loss is strike minus premium.

Spreads. Net the premiums: that is one extreme. Strike difference minus the net premium is the other. Breakeven is the lower strike plus the net premium for call spreads, the higher strike minus it for put spreads. Check that the two extremes sum to the strike difference.

Straddles. Total premium is one extreme; two breakevens at the strike plus and minus the total premium.

Covered call. Maximum gain is appreciation to the strike plus the premium; breakeven is the stock cost minus the premium.

Protective put. Maximum loss is stock cost minus strike plus premium; breakeven is stock cost plus premium.

Long margin. LMV minus DR equals equity. Reg T requirement is 50 percent of LMV. Excess equity above that creates SMA; buying power is twice SMA. The maintenance call point is the debit divided by 0.75.

Short margin. CR minus SMV equals equity. The credit starts at 150 percent of the sale proceeds. The maintenance call point is the credit divided by 1.30.

Bond yields. Current yield is annual interest over price. Approximate yield to maturity is annual interest plus or minus the annualized gain or loss, over the average of price and par. Then confirm the ordering: ascending for a discount, descending for a premium.

Accrued interest. 30/360 for corporate and municipal, actual/actual for government, up to but not including settlement.

Taxable equivalent yield. Municipal yield divided by one minus the marginal rate — combined federal and state for an in-state bond.

Mutual funds. POP is NAV divided by one minus the sales charge percentage. Sales charge percentage is POP minus NAV, over POP.

Rights. Cum rights is (M minus S) over (N plus 1); ex rights is (M minus S) over N.

Conversion. Ratio is par over conversion price; stock parity is bond price over ratio; bond parity is stock price times ratio.

Voting. Statutory is shares per seat; cumulative is shares times seats.

The distractors

Distractors on this exam are constructed, not random, and knowing how they are built is a real defence.

The right answer to the mirror question. A question about a long put's maximum gain will offer 'unlimited', which is the long call's answer.

The result of the plausible wrong operation. A sales charge question will offer NAV plus the percentage as well as NAV divided by one minus the percentage.

The correct number for a different security type. A settlement question will offer T+2; an accrued interest question will offer the actual/actual answer when the security is a corporate bond.

The pre-amendment answer. Retake waiting periods of 30 and 180 days, ex-dividend dates two business days before the record date, a $5,000,000 Rule 504 ceiling. Study material ages, and the exam is current.

The option-only answer where stock is also in the position. When a question gives stock plus options, the option-alone figure will be among the choices.

The unit error. A per-share answer where the question asked for the contract, or the reverse. Multiply by 100 last, deliberately, and check the question is asking for the total.

One useful habit against all of these: before looking at the choices, decide what the answer should be. A distractor only works on someone who is choosing between four options rather than checking four options against a conclusion.

The clock

225 minutes for 130 items is about one minute forty-four seconds each. That average is misleading, because the distribution is bimodal: definitions and classifications take twenty seconds and margin questions take three minutes.

The workable approach is three passes. First pass: answer everything you know immediately, and flag anything that will take real work. Do not do calculations on the first pass. Second pass: work the flagged calculations. Third pass: revisit anything still unresolved and confirm that every item has an answer.

Check the clock at the quarter marks. At a third of the time you want to be about a third of the way through; if you are well behind, you are spending too long on individual items and should start flagging more aggressively.

Never leave a blank. There is no penalty for guessing, so an unanswered item is a discarded chance. If you must guess, eliminate what you can first — two eliminations turn a 25 percent chance into 50 percent, and across ten such items that is worth two or three marks.

Use the scratch material. Draw the payoff diagram, write the margin account out in three lines, write the four dividend dates in order. Every one of those takes seconds and eliminates a category of error that costs whole marks.

And expect the exam to feel harder than your practice sets. It draws from the same specification but the items are written to discriminate, and the pretest items scattered through it are, by definition, unvalidated. A question that seems unreasonably obscure may well be one of the five that do not count.