Investment banking is a dynamic and ever-evolving world of finance. Aspiring for a career in investment banking is the ambition of many, people are highly drawn to it because of its stake deals, the lucrative financial rewards and to work in a highly collaborative environment and the biggest minds in the finance industry. A successful career in investment banking requires unwavering dedication, a sharp analytical mind, and the ability to work under pressure. To help you in your journey we have given you the best investment banking interview questions and answers. We have filtered out the important investment banking interview questions to make it easier to refer to them and get an idea of how to answer them with perfection and acquire a good position at reputed banks and organizations.
Investment banking is a highly competitive field with a sea of opportunities to grow. In an investment banking interview your skillset, your technical knowledge, and how you deal with practical problems are put to the test. Your passion for the work and people’s skills will be the major factors for the companies to hire you.
All of the investment banking interview questions enlisted here are not just asked to check your technical knowledge of the field but to know more about your presentation and communication skills.
The structure of investment banking interview questions often includes a set of generic interview questions, questions regarding the technical aspect, and then practical questions to analyze your logical thinking and how smart you are in applying them in your career as an investment banker.
A career in investment banking needs you to have the ability to work under pressure, The interviewer might give instances to know how well you respond to stress and pressure. The article provides you with an ultimate guide to the best investment banking interview questions to make you ace the interview effortlessly.
The first set of investment banking interview questions includes generic questions which is your chance to make an impression and sell yourself. This is where you can pull out your soft skills, public speaking, and communication skills which are integral to a good career in investment banking. Other skills which are evaluated during the interview are your analytical skills and sense of innovation.
Listed below are some important generic investment banking interview questions
1. Walk me through your resume
This is the first question you are going to encounter at your interview and is not part of technical investment banking interview questions. Supposing that you have built a strong resume highlighting your education, your skills, and your previous experience in the field, the interviewer through this question requires you to give a brief of your resume so that they can evaluate the way you speak, and your confidence and know more about you.
While briefing your resume make sure you talk with full confidence and energy, be passionate when you talk about yourself be crisp and clear. This is the first impression they have of you, try to make it as smooth as possible.
2. Why investment banking?
Be passionate when you answer this question. The answer must be tailored toward why you choose the field, although big paychecks are one of the reasons try not to mention. Communicate how passionate you are about the dynamicity and collaborative nature. Make it clear that you are fit to work in a fast-paced work environment. Mention the work and dedication you have put in your past work and educational environment to learn and grow in the field. Be logical and present your ideas clearly with a natural flow.
3. Why should we pick you? And why this bank?
This question is one of the most important questions among top investment banking interview questions the list highlights how unique you are and how you stand out from the other potential candidates. You can stress your skills and the place you have made use of those skills. List out your achievements and convey that you are the ideal candidate as you are ready to experience the work hustle and ethics.
To answer the question of why you selected the particular bank, you must be well aware of all the information about the bank, You should thoroughly go through and study the website of the bank, their outlook, their goals, and banking strategies, this, give the interviewee a impression that you have made a good effort in understanding the bank and its policies.
Also, make follow-ups of the bank’s press releases and announcements. It would be also great if you had some social ethics and values that align with those of the companies. This is a bonus point for the company to consider you for the position
This set of investment banking interview questions is just a warm-up to know more about you in detail and to analyze the way you present and communicate and your behavior.
The next section includes technical investment banking interview questions with their answers.
1. What is CAPM? How to Calculate it? Explain in Detail.
CAPM stands for capital asset pricing model, it is a mathematical model, and it is a method to quantify risk, converting it into estimates of the expected return of an investment. It estimates the cost of equity in an adjective nature. The formula of The formula for the cost of equity is
Cost of Equity = Risk-Free Rate + Beta * Equity Risk Premium
CAPM analyses the relationship between the investment’s riskiness and the inherent risks in the market.
2. What does Negative Working Capital Mean?
It is when the current liabilities are more than its current assets. It is not typically regarded as a desirable thing, but it can be advantageous in certain circumstances, for some companies. Occasionally, this means that the business can create income so quickly that it has time in between to pay its creditors and suppliers. In essence, the business uses the money from its suppliers to fund its daily operations. But if the time taken to receive income are too high and the payables are too low, then it can pose serious issues for the organization to run properly.
3. What Are the Three Main Financial Statements? How Do They Impact Each Other? Explain.
The three main financial statements are
- Income statement- Reveals company revenue and expenses to get the net income
- Balance sheet – Shows companies assets liabilities and equity at the end of a period.
- Cash flow statement – it pulls from both the income statement and the balance sheet. It starts by calculating the net income from the income statement and then adjusts for non-cash expenses, non-operating expenses like capital expenditures, changes in working capital, or debt repayment and issuance. Then the change in cash flow measured is reflected back on the balance sheet.
4. How is It Possible for a Company to Go Bankrupt but Still Have a Positive Net Income?
Net income is the profit the company gets after accounting for all expenses and taxes. It means the company is making more money than spending. But net income is just one aspect of financial health, having a positive net income does not necessarily mean that the company
Is in good financial health. The two other factors that impact a company in its financial health are
Debt even if the company is making a profit, it may have a high level of debt to sustain its daily operations
Poor cash flow management – Even if a company is profitable and runs smoothly, it may not be able to manage its cash flow effectively. meaning it may be spending money faster than it is earning.
These factors also play a major role in pushing a company to bankruptcy.
5. What is an Initial Public Offering (IPO)?
Ipo stands for Initial Public offering it is the process where a private company issues shares of itself to the public. It is the chance for the company to raise equity capital from public investors. The change from a private to a public company can be an important opportunity for private investors to fully realize gains from their investment as it includes a share premium for current private investors, it also allows public investors to participate in the offering. An IPO can be viewed as an exit strategy for the company’s founders and early investors, realizing the full profit from their private investment.
6. What is Net Working Capital?
Working capital, also called net working capital (NWC), is the difference between a company’s current assets—such as cash, accounts receivable/customers’ unpaid bills, and inventories of raw materials and finished goods—and its current liabilities, such as accounts payable and debts. it shows how easily a company can meet its current liabilities with its current assets, should it need to in an emergency.
Second, working capital can be a significant source of cash for the business in ongoing operations. High working capital isn’t always a good thing. It can also be an indication that the business has too much inventory, not investing its excess cash, or not capitalizing on low-expense debt opportunities.
7. What is EBITDA, and why are EBITDA Multiples Sometimes Preferred to P/E Ratios?
EBITDA is earnings before interest, taxes, depreciation, and amortization. EBITDA is calculated before other factors, such as interest and taxes, are considered. It also excludes depreciation and amortization, which are non-cash expenses. Therefore, the metric can provide a clearer and crisp picture of the financial performance of a company. In some circumstances, it’s used as an alternative to net income when evaluating a company’s profitability.
Price/Earnings is a measure of the equity value of the company (not including any debt) to how much the company can make in pure profits. It’s a comparison of the relative earnings power of companies.
EBITDA is preferred by investment bankers when trying to judge the value of entire companies sold and bought. All financial obligations must be taken into account, including debt, so this is a preferred measure.
8. Which Has a Higher Cost of Capital: Debt or Equity? Why?
Equity financing has a higher cost of capital than debt financing. Debt capital is borrowed funds that must be repaid later in the future. This is any form of growth capital a company raises by means of taking out loans. These loans may be long-term or short-term
equity capital comes from funds invested by shareholders. Equity funds don’t require a business to take out debt which means there is often no need to repay it.
Legally, businesses must repay their debt before their equity and must pay dividends to shareholders before they may pay out debt. This has a few advantages. It lessens the likelihood of a debt default, potentially lowering the cost of capital. The company’s interest payments on the debt are typically tax deductible, which lowers their cost of capital by the corporate tax rate.
9. How to Calculate Acquisition Premium?
Acquisition premium is the difference between the price paid for the target company in a merger or acquisition and the target’s assessed market value. It gives the excess amount over the fair value of all identifiable assets paid by an acquiring company. The acquisition premium is also called goodwill and is maintained on the acquirer’s balance sheet as an intangible asset.
10. Describe the Basics of the LBO model.
The LBO model is a financial tool to evaluate the leveraged buyout. A leveraged buyout is using a significant amount of borrowed funds for the acquisition of a public or private company. A private equity firm acquires a company using debt instruments as the majority of the purchase price.
After the purchase of the company, the debt/equity ratio is generally greater than one. Paying down the outstanding debt is done with the company’s cash flow during the ownership of the company. The overall return realized by the investors in an LBO is determined by the exit cash flow of the company, the exit multiple, and the amount of debt that has been paid off over the time period of the investment.
11. Tell Me About Major Items in Shareholder’s Equity.
Shareholders’ equity (SE) is used by investors and corporate accounting experts to assess how a firm is using and managing its initial capital as well as to estimate the company’s value.
Total corporate assets minus total corporate liabilities equals shareholders’ equity. However, this equity computation is made up of a number of elements.
12. What is WACC? How do you calculate it?
WACC is the weighted average cost of capital. It is the average rate of return a company is expected to pay to all its shareholders, including debt holders, equity shareholders, and preferred equity shareholders. WACC is also usually the discount rate used in the DCF formula.
WACC Formula = [Cost of Equity * % of Equity] + [Cost of Debt * % of Debt * (1-Tax Rate)] where E = market value of equity, D = market value of debt
13. What is DCF? What are the pros and cons of DCf?
DCF stands for the Discounted cash flow model, which shows the value of future cash flows from a company over a time period, it is used to determine if the investment is worthwhile. This is a solid anchor for valuation and pricing estimates.
Pros: The DCF is one of the most effective methods for determining a company’s valuation, provided that the WACC and growth rate assumptions are correct. It negates the influence of dominant market forces.
Cons: While market dynamics beyond the company’s control aren’t taken into account by the DCF, the forces CAN and DO readily modify a company’s valuation overnight in the actual world. Additionally, the DCF is based on a number of speculative assumptions such as (WACC, discount rate, etc.) which are purely theoretical.
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These are the most important investment banking interview questions that have a high chance of being asked in an interview at reputed banks and organizations,
What salary can I expect as an investment banker in India?
A career in the field of investment banking can be very rewarding and can give you an average of ₹17,66,877 per year, 6 lakhs per year at the junior level.
What is the educational qualification needed for an investment banker?
To get into an entry-level position you should have earned a three or four-year bachelor’s degree. You can get any of the following: a Bachelor of Commerce (B.Com.), a Bachelor of Arts (B.A.) in finance, a Bachelor of Arts (B.A.) in economics, and a Bachelor of Business Administration (BBA) in finance.
What are the working hours of an investment banker?
An investment banking career is not a nine-to-five job, an investment banker will have to work 60 to 100 hours per week
In conclusion, pursuing a career in investment banking is a rewarding journey that requires relentless dedication. The top investment banking interview questions we’ve explored will help you get an idea of the questions asked at the interview. While the road to becoming an investment banker is undeniably challenging, the potential rewards are equally substantial. It’s a field where intelligence and opportunity play an equal role in determining success in the career. Your ability to navigate highly complex financial deals can have a lasting impact and reward you with a lucrative salary.
As discussed above the interviewer can ask behavioral and technical investment banking interview questions. They have equal importance in the decision-making of the interviewer. Make sure you prepare well and make yourself aware of the latest investment banking trends and news so as to be capable of answering all the questions with confidence. Although learning the above-discussed investment banking interview questions is your key to clearing the interview, it is absolutely necessary for you to have a sense of dedication and passion to reach heights in your investment banking career.