Series 162 — Valuation of Securities Exam Blueprint

How to Use This Exam Blueprint

Use this independent Exam Blueprint as a practical study map for the FINRA Series 162 — Supervisory Analyst Qualification Examination (Part II: Valuation of Securities), exam code Series 162.

For each area, aim for four levels of readiness:

1. Define the term or security feature.
2. Calculate the relevant value, yield, ratio, or sensitivity.
3. Interpret what the result means for investors or research conclusions.
4. Supervise the analysis: identify unsupported assumptions, inconsistent conclusions, missing risks, or weak valuation logic.

Check an item only when you can answer a mixed scenario without notes and explain why the other choices are less appropriate.

Topic-area readiness table

What “ready” means for valuation questions

A Series 162 candidate should be prepared to move from facts to judgment. Many valuation questions are not just “plug in the formula” questions. They may ask what a number implies, which input is most important, or whether a conclusion is supported.

Core formula and calculation checks

You should be able to write, use, and interpret the following formulas. More important than memorizing symbols is knowing when each formula is appropriate.

Equity and profitability ratios

\[ \text{EPS} = \frac{\text{net income} - \text{preferred dividends}}{\text{weighted average common shares}} \]\[ \text{P/E ratio} = \frac{\text{market price per share}}{\text{earnings per share}} \]\[ \text{Dividend yield} = \frac{\text{annual dividend per share}}{\text{market price per share}} \]\[ \text{ROE} = \frac{\text{net income}}{\text{average common equity}} \]

Dividend discount and discounted cash flow logic

For a constant-growth dividend model:

\[ V_0 = \frac{D_1}{r-g} \]

Use this only when the assumptions are reasonable: \(D_1\) is the expected next dividend, \(r\) is the required return, and \(g\) is a sustainable growth rate below \(r\).

Can you explain each of these?

• Why using the current dividend instead of the expected dividend changes the value.
• Why the model breaks down when growth is greater than or equal to the required return.
• Why a small change in growth or required return can cause a large change in estimated value.
• Why a stable dividend model may not fit a young, cyclical, distressed, or non-dividend-paying company.

Fixed income valuation

A basic bond valuation framework discounts coupon payments and principal:

\[ P = \sum_{t=1}^{n}\frac{C}{(1+y)^t} + \frac{F}{(1+y)^n} \]

Where \(P\) is price, \(C\) is coupon payment, \(F\) is face value, \(y\) is yield per period, and \(n\) is the number of periods.

Approximate price sensitivity to a yield change:

\[ \%\Delta P \approx -D_{\text{mod}} \times \Delta y \]

Convertibles, warrants, and options

\[ \text{Conversion value} = \text{conversion ratio} \times \text{market price of common stock} \]\[ \text{Call intrinsic value} = \max(S-K,0) \]\[ \text{Put intrinsic value} = \max(K-S,0) \]

Financial statement analysis checklist

A valuation conclusion is only as strong as the financial data behind it.

Statement-level checks

Quality-of-earnings prompts

• Can you distinguish revenue growth from margin expansion?
• Can you identify when EPS growth is driven by share repurchases rather than operating improvement?
• Can you spot a nonrecurring gain that inflates net income?
• Can you explain why positive earnings with negative operating cash flow may be a warning sign?
• Can you identify how inventory, receivables, depreciation, and reserves may affect reported results?
• Can you explain why leverage can magnify both returns and risk?
• Can you compare companies with different capital structures without misusing equity-only metrics?

Equity valuation checklist

Model-selection readiness

Equity “can you do this?” checklist

• Calculate and interpret EPS, P/E, dividend yield, payout ratio, book value per share, and ROE.
• Explain the difference between trailing, forward, and normalized earnings.
• Identify when a low P/E may indicate risk rather than undervaluation.
• Identify when a high P/E may be supported by growth, margins, or returns on capital.
• Explain why comparable companies must be similar in business model, growth, margins, leverage, and risk.
• Distinguish enterprise value metrics from equity value metrics.
• Explain how rising interest rates may pressure equity valuations through higher discount rates.
• Identify whether a price target is supported by the valuation method and assumptions used.
• Recognize when sensitivity analysis is needed because the valuation depends heavily on one input.

Fixed income checklist

Bond price and yield relationships

Can you answer these without hesitation?

• If market rates rise, what generally happens to existing bond prices?
• If market rates fall, what generally happens to existing bond prices?
• Which usually has more interest-rate sensitivity: a longer-maturity bond or a shorter-maturity bond?
• Which usually has more interest-rate sensitivity: a lower-coupon bond or a higher-coupon bond?
• For a premium bond, how does coupon rate generally compare with yield?
• For a discount bond, how does coupon rate generally compare with yield?
• Why does credit deterioration widen spreads and reduce price?
• Why can a callable bond’s price appreciation be limited when rates fall?

Fixed income scenario checks

Preferred, convertible, and hybrid securities checklist

Convertible calculation prompts

• Conversion ratio = par value divided by conversion price.
• Conversion value = conversion ratio multiplied by common stock market price.
• Conversion premium can be expressed as a dollar amount or percentage; be clear which is requested.
• If the common stock rises substantially, the convertible may trade more like equity.
• If the common stock is far below the conversion price, the convertible may trade more like debt.
• Calls can force a holder to choose between conversion and redemption depending on terms and market value.

Options and derivative valuation checklist

Options questions often test payoff logic and value drivers rather than complex pricing models.

Option payoff prompts

• A call buyer benefits from the underlying price rising above the strike plus premium paid.
• A put buyer benefits from the underlying price falling below the strike less premium paid.
• A call seller has an obligation if exercised.
• A put seller has an obligation if exercised.
• Option premium includes intrinsic value, if any, plus time value.
• Hedging and speculation can use the same instrument but have different risk purposes.

Economics, markets, and quantitative tools

Macro-to-valuation links

Quantitative readiness

\[ \text{Expected return} = \text{risk-free rate} + \beta \times \text{market risk premium} \]

Be able to use quantitative inputs without overclaiming precision.

• Explain beta as sensitivity to market movement, not total risk.
• Distinguish standard deviation from beta.
• Explain correlation and diversification in plain language.
• Identify when averages may be misleading because of outliers or cyclicality.
• Understand that model output depends on input assumptions.
• Read a sensitivity table and identify the most important valuation drivers.

Supervisory analyst review lens

For the Series 162 exam identity, do not study valuation as a purely mechanical exercise. A supervisory analyst must be able to evaluate whether analysis is reasonable, supported, and internally consistent.

Decision path for valuation questions

Use this workflow when a scenario feels broad or unfamiliar.

    flowchart TD
	    A[Identify the security] --> B{Common stock?}
	    B -->|Yes| C[Check earnings, cash flow, dividends, growth, comparables]
	    B -->|No| D{Debt or preferred?}
	    D -->|Debt| E[Check coupon, maturity, yield, duration, credit, call features]
	    D -->|Preferred| F[Check dividend, priority, call terms, convertibility]
	    D -->|Hybrid or option| G[Check conversion value, intrinsic value, time value, payoff]
	    C --> H[Select suitable valuation method]
	    E --> H
	    F --> H
	    G --> H
	    H --> I[Calculate or interpret key metric]
	    I --> J[Assess assumptions and risks]
	    J --> K[Decide whether conclusion is supported]

Scenario and decision-point drills

Common weak areas and traps

• Confusing coupon rate, current yield, and yield to maturity.
• Forgetting that bond prices and yields generally move in opposite directions.
• Treating duration as exact for large yield changes instead of an approximation.
• Ignoring call risk when rates fall.
• Using P/E when earnings are negative, temporary, or distorted.
• Comparing companies with different leverage using equity metrics only.
• Forgetting preferred dividends when calculating EPS for common shareholders.
• Treating accounting earnings and free cash flow as the same.
• Using current dividend instead of expected dividend in a dividend discount setup.
• Applying a constant-growth model with an unsustainable growth assumption.
• Confusing enterprise value with market capitalization.
• Ignoring dilution from convertibles, options, or warrants.
• Reversing call and put intrinsic value logic.
• Treating volatility as a directional forecast rather than an uncertainty input.
• Assuming a high yield, low P/E, or large discount automatically means undervaluation.
• Accepting a price target without checking the assumptions that produce it.
• Missing whether the question asks for dollar value, percentage value, yield, spread, or interpretation.

Final-week checklist

Formula and concept recall

• Write your core formulas from memory: EPS, P/E, dividend yield, ROE, DDM, bond price logic, current yield, duration approximation, conversion value, option intrinsic value.
• For each formula, write one sentence explaining when it should not be used.
• Drill premium versus discount bond relationships until they are automatic.
• Drill call versus put intrinsic value until there is no hesitation.
• Review the difference between income statement earnings and cash flow.

Mixed-practice readiness

• Complete mixed sets that include equities, bonds, convertibles, preferred stock, options, and research-review scenarios.
• After every missed question, classify the error: formula, concept, interpretation, wording, or timing.
• Redo missed questions without looking at explanations.
• Practice explaining why the correct answer is better than the second-best answer.
• Include qualitative scenarios, not just calculation drills.

Supervisory review readiness

• Review sample valuation arguments and identify unsupported assumptions.
• Check whether price targets are consistent with the valuation method.
• Identify missing risk factors in bullish and bearish theses.
• Practice challenging comparable-company selections.
• Practice identifying stale, nonrecurring, or non-comparable data.

Exam-day execution

• Read the security type first: common stock, bond, preferred, convertible, option, or fund/security basket.
• Identify the question task: calculate, compare, interpret, or critique.
• Write down the key relationship before calculating.
• Estimate direction first when possible; use it to catch arithmetic errors.
• Watch for words such as “most likely,” “least likely,” “except,” “premium,” “discount,” “current,” “expected,” and “convertible.”
• Do not overcomplicate a definition question, and do not under-analyze a scenario question.

Practical next step

Choose your weakest two areas from the table above and complete one focused practice set for each. Then complete a mixed valuation set that forces you to switch among equity, fixed income, hybrid, option, and supervisory-review reasoning. Update your error log by topic and repeat the checklist until each item can be answered without notes.