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How to Study for a Licensing Test

I recently passed the most difficult test of my career, the CFP exam. I knew it would be the hardest test I had ever taken, but I wasn’t nervous because I had done everything in my power to prepare for the exam.

As a securities and insurance test-preparation instructor, I help many students along the licensing exam journey. Here are some strategies I recommend to them.

When I teach a test-prep class, I often have a student ask me, “Do I really need to read the study material, or is taking the class enough to pass?”

My response is “How can you expect to pass a test when you haven’t read the material you will be tested on?”

To study for a test, I recommend you read the material for a course unit and highlight important facts for future review. Each unit will have a practice test at the end that you will need to complete. Doing practice questions immediately after reading a unit will seal the information in your mind.

For any exam that requires a 70 percent passing score, you need to do more questions on any unit test where you score below 80 percent. Most study programs have a website that offers additional practice questions on each unit. If you have this technology, I recommend taking all the available practice questions on the website for all of your sub-80-percent units. If you do this, you will increase your proficiency on those units to around 75 percent. If 75 percent is your worst unit, you will easily pass a test that requires only a 70 percent score.


Four Words That Can Trip You

In a four-answer multiple-choice test such as the CFP exam and many others, there are four words that will lower your score dramatically if you aren’t conscious of them — except, not, false and least. Here is how these four words can trip you up.

You spend all your time studying the correct answers, so your mind naturally gravitates toward them. But with questions that include the words except, not and false, you are looking for the wrong answer.

Here are some examples.


1. For a general obligation bond, all of the following revenue sources could be used for debt service except:


A.         Sales taxes.

B.         Property taxes.

C.         Tolls of a tollway.

D.         License fees.


The correct answer is C. Tolls of a tollway.  With an except question, you are looking for the wrong answer.  Debt service is the interest payments and principal payment of a bond.  A general obligation bond uses taxes or fees assessed by a municipality to pay interest and principal.  Revenue bonds use user fees from a facility,

like tolls from a bridge or tollway, to pay debt service.


2. Which of the following is not a typical characteristic of a closed-end fund?


A.         They can issue debt securities.

B.         Investors redeem their shares directly with the company.

C.         Their shares are bought and sold in the secondary market.

D.         They are classified as a management company.


The correct answer is B. Investors redeem their shares directly with the company. With a not question, you also are looking for the wrong answer. Closed-end funds trade like a stock in the secondary market. In order to redeem your shares, you use a broker-dealer to help you find a buyer for them. Mutual funds are a type of open-end fund. Their shares are redeemed by investors directly with the company.


3. Which of the following statements regarding Treasury receipts are false?


I.          They pay annual interest payments.

II.         Interest is taxed annually.

III.        They pay interest at maturity.

IV.        Interest is taxed at maturity.


A.         I and II

B.         I and III

C.         II and III

D.         I and IV


The correct answer is D. I and IV. False questions usually have Roman numeral answers where two are true and two are false. You are looking for the false answers.

Treasury receipts are zero coupon debt instruments created by broker/dealers that are written against the individual payments of Treasury notes and Treasury bonds. They are sometimes called government zeroes. Zeroes are purchased at a deep discount below the par value and pay all of their interest on the maturity date. It is the difference between the purchase price and the redeemed principal. Investors are taxed on interest annually, as it is earned, not received. It is called imputed or “phantom” interest.  Therefore, the principal payment at maturity is tax-free.

The word least turns a question upside

down. For example, instead of looking for the most likely investment you would recommend to a client, you are looking for the least likely one. Here’s a sample of a least type of question.


4. In a partial call bond issue, a corporation would be least likely to call which of the following bonds first?


A.         8 1/2%, callable at 100.

B.         8 1/2%, callable at 102.

C.         6 3/4%, callable at 101.

D.         6 3/4%, callable at 100.


The correct answer is C. 6 3/4%, callable at 101. With a least question, you have to read it upside down. The most likely bond a corporation would call is the one that is costing them the highest annual interest with the lowest call price to retire it, which is letter A.  Therefore, the least likely one they would call is the bond with the lowest annual interest rate and the highest call price.

I begin and end each class I teach by pointing out these four tricky words, and I instruct my students to look for them very carefully. These words often can be the difference between passing and failing a test. To guard against missing these words, I recommend going back and looking for them after you have finished your first pass through the test. You will be amazed how many of them you did not catch the first time.

Questions with more than one correct or false answer are particularly difficult. They are the ones with four Roman numeral answers that are often longer than the question!

Each answer is simply a true-or-false statement. I recommend you write down the numerals, and as you read the available answers, write T for true and F for false next to each one. On a four-answer test question, there are usually two that are true and two that are false, but not always. The good news is that this true/false technique works no matter what combination you encounter.

For the Roman numeral except questions, the false answers will be the correct ones. They are especially frustrating and will undoubtedly be the questions you most likely correct when you go back and look for the word except after you complete the test.


How Soon Is Too Soon?

A review class is extremely important because it can dramatically increase your score if you use a test-prep company. I recommend taking your exam seven to 10 days after a review class. If you take the test too soon after the review class, you won’t be able to assimilate all of the information offered in the class. If you take the exam too late after the review class, you will forget much of the class material.

After you have taken your review class, I highly recommend you highlight terms in your study material glossary that are unfamiliar to you and become familiar with them. In a test question, if you see a word you do not recognize, you will be hard-pressed to answer the question correctly, because you probably will be asked for the specific meaning of that word. Or the exam will give you a definition of a word and give you four glossary terms to choose from. Now, you will have to know the meaning of all four words to find the right one. Knowing glossary terms will turn these questions into what I call gimmes.

You have to be careful with last-minute preparation. Reading study manuals and doing practice questions the night before a test will overwhelm you.

The only two things you want to do right before an exam are studying your review notes and reviewing the terms you highlighted in the glossary.

I also recommend you get a good night’s sleep the night before an exam, because a lack of sleep will diminish your decision-making skills during the test. So many students have crammed themselves into failing an exam. You want to have all of the pertinent test information at the front of your mind, but you don’t want to give yourself TMI (too much information).


Brad F. Charles, MBA, CFP, has been in the financial services industry for 19 years, including 17 years with MetLife.  He currently teaches prelicensing for Series 7, Series 6, Series 63, Life and Health, and Property and Casualty for Kaplan University, Milwaukee. Brad may be contacted at [email protected]

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