Friday, July 17, 2009

Interest Rate Risk

Which of the following securities is most susceptible to interest rate risk?
A. straight preferred stock
B. convertible preferred stock
C. convertible debentures
D. common stock

EXPLANATION: bonds and preferred stock are subject to interest rate risk--rates up, market price down. They pay a fixed rate of return, so whenever interest rates on new fixed income securities go up, the market values of existing fixed income securities drop. Every single time. Common stock doesn't pay a fixed rate of return, so interest rates are not as relevant to its market price. The market price for common stock is based on expectation of future profits, with bits of news driving those expectations up and down every day.
All righty then. Using these fundamental concepts, we can eliminate common stock, and then, since common stock drives the value of convertible preferred and convertible bonds, we can eliminate those two choices, too. We're left with straight preferred stock, which pays a fixed rate of return, period.


  1. I'm sorry, but my comment doesn't relate to your entry. I would rather email you, but I don't have your email address.

    I've read on Investopida that a Series 66 equals a 63 and 65. Is that true? It's probably better to take the 66 then. I'm assuming it would be much harder. You've mentioned earlier that I can sponsor myself. Where can I obtain the application? Am I able to apply online or only through the firm?
    Again, I apologize for commenting on something that is irrelevant to your post.

  2. Hi, Daniel

    The 66 is not harder or more impressive than the 65; they're "six of one, half dozen of the other.
    Either way at under "industry and regulatory resources" click on "exams". You want the U-10, and you can do this by printing it out or online. Again, the 65 and the 66 lead to the same result. Did you already take the 63 after taking the 7?

  3. Hello,
    Thank you for replying. I really appreciate it.
    I haven't taken the 63 yet. My firm recommends that I study, take, and pass the 55 first because it'll help me get better prices when trading.
    In the end, I'm supposed to have all three - 7, 55, 63. I haven't really heard much about the 66/65. My firm doesn't really mention those exams. Those exams are more for IAs and IARs, correct? If I can sponsor myself, I may consider taking it. Do you think it'll help me?

  4. Hi, Daniel

    Your comments provide good material for blog readers--thanks.
    Your firm is a broker-dealer who wants you to have "broker-dealer" licenses. The 7 and the 55 are trader/stockbroker licenses, and the 63 is a state law requirement on top of those.
    The 65/66 is a different business model. You would work for an adviser. You wouldn't make commissions; you'd get a % of your clients' assets on an ongoing basis. As the assets grow, so does your take. When account values tank--as they have lately--your % = less money. Passing the 65/66 allows you to represent an adviser or even start your own advisory firm. Not sure how your current firm feels about your involvement with this side of the business, but I would ask them. Broker-dealers have to be informed of all outside business activities under FINRA rules. For info on setting up an RIA,

  5. Hello,
    Again, thank you for replying.
    I've been thinking of going to the stockbroker route. Would my trading experience be of any help in the "stockbroker" field? In your opinion, how are stockbrokers doing these days in the current economic condition?
    I'm thinking of going towards the stockbroker route. Although I'm new to the financial world, I feel like this is something I'll like. I don't know too much about being an adviser.
    I know this may be a vague question, but what do you think is the best route when it comes down to experience? Money is a huge factor, but equally or more concerned with experience. My goal (or dream) is to start up my own company. What will give me the best experience and help me obtain the most knowledge?

    Again, thank you very much. I appreciate your help.

  6. It probably comes down to which activities you would enjoy the most. Do you like to get "in the zone" and trade stocks with intensity? If so, you can work on a trading desk for a broker-dealer with a Series 7 and probably a 55. After you get some trading experience, you could start working toward your CFA (chartered financial analyst). With those credentials, you could start your own hedge fund or "private equity group."