Investment Banking Interview Questions and Answers

28-Jun-2022

Take help from these Investment banking Interview questions and answers if you are preparing for an interview to work as an Investment banker. It is without a doubt that investment banking positions are increasingly gaining traction with a swarm of new professionals taking interest in the field augmented by the need for finance experts across companies. 

While investment banking is considered a tough job to get into, those with accurate knowledge, skill, and acumen can pursue a career in Investment banking.

We have formulated the most relevant and probable banking interview questions and answers categorized into scenario-based investment banking interview questions and Industry relevant investment banking interview questions. 

Regardless of the category, the following banking interview questions & answers should help you in your interview. 

Subject Matter-based Investment Banking Interview Questions

1. How is Investment Banking referred to in other terms?

Corporate Finance is another name for investment banking.

2. What is the formula for calculating Working Capital?

Working capital is the result of the differences between Current Assets and Current Liabilities and the equation can be written as: 

Working Capital= Current Assets - Current  Liabilities

3. Which is usually more expensive, the cost of equity or the cost of debt?

The cost of equity is invariably higher than that of the debt as the borrowing debt is tax-deductible. In addition, equity costs are higher since, unlike lenders, equity investors are not assured of receiving predictable payments. 

Debt costs less because interest payments are regarded as expenses. In a company's capital structure, debt is also prioritized. Therefore, in a liquidation or bankruptcy situation, the debt holders receive payment before the equity holders.

4. Explain WACC

WACC stands for Weighted Average Cost of Capital. It involves a proportionally weighted computation of an organization's capital. It encompasses all available sources of funding and considers things like depreciation, tax rates, debt, and equity.

5. Define Monetary Policy.

Monetary policy is a method of controlling the money supply by the government or the central bank. which the government. It entails money availability and the rate of interest, meeting a set of objectives with the orientation for economic growth and stability.

6. Define money laundering

The act of making it appear as though a sizable sum of money earned through illegal conduct, such as drug trafficking or terrorism, came from a legitimate source is known as money laundering.

7. Differentiate between Investment Banking and Commercial Banking

The key distinctions between Investment banking and commercial banking can be made in the following manner.

• Commercial banking: Customers' deposits are accepted, and the company uses that money to fund commercial loans. On the bank's balance sheet, the majority of the loans provided by commercial banks are listed as assets in commercial banking,
• Investment banking, on the contrary, serves as a go-between for businesses and investors. Instead of taking deposits, it sells investments, provides M&A advice, and holds loans made with debt or equity that the bank has created.

8. Define Deferred Tax.

Any time a corporation pays the IRS more tax than what is shown on its income statement, a deferred tax asset is formed. It is produced by disparities in revenue recognition and net operating losses.

9. Can you explain what Fairness Opinion is?

Fairness opinion would mean an impartial evaluation of an investment bank issue. In a merger or acquisition, the price given is primarily included. It offers a fixed fee and is often provided by a non-transactional institution.

10. Describe Beta. 

The riskiness of a particular stock is gauged by beta. It is computed by dividing the covariance between the return on a stock and the return on the entire equity market by the variation in the return provided by the market. Beta is 1.0 by default. Stocks with betas greater than 1 are seen as riskier than the market. A stock with a beta below one is seen as less dangerous.

11. When should a company be valued using a revenue multiple rather than EBITDA?

A company with negative profit and EBITDA is likely to have EBITDA multiples that are nonsensical. This is so because EBITA revenue multiples provide more useful information.

12. Why is there a merger between two companies?

Several significant factors lead to the two businesses merging. Some of the major reasons are:

• Expanding potential
• To Obtain an advantage over a greater market share
• Increasing the variety of offerings
• The combined entity will significantly reduce costs.

13. Describe CAPM.

The Capital Asset Pricing Model is called CAPM. Its goal is to calculate the anticipated return on investment. For a company's cash flows, it enables computing the discount rate.

14. How is the beta for a certain company calculated?

Because of estimating flaws, computing betas for past returns involves computing future beta. Due to varying rates of leverage, comparable companies' betas are erroneous.

For that, you use the betas of these comparable businesses in the following manner:

β Unlevered = β(Levered) / [1+ (Debt/Equity) (1-T)]

Next, you must calculate the average of the unlevered beta and apply it to the capital structure of the target firm:

β Levered = β(Unlevered) x [1+(Debt/Equity) (1-T)

15. Describe a Good Financial Model.

A lot of techniques go into building a bank. The best financial model is one that recognizes all of the key company drivers. It is consistently exact and accurate. Dynamic scenarios with built-in analysis and error checking should be handled by the model.

16. How is Enterprise value calculated?

Enterprise value can be calculated by using the following formula:

Market value of equity + debt + preferred stock + minority interest cash.

17. Differentiate accrual accounting from cash-based accounting?

When money is received or spent in cash, the terms revenue and expense are used. The opposite is true for accrual accounting, which records revenue when it is reasonably certain it will be collected and expenses when they are incurred rather than when they are paid for in cash.

18. Differentiate Equity value for Enterprise Value.

Enterprise value is the portion of a company's operations that can be attributed to all capital sources. It is crucial to also consider enterprise value as the takeover worth or value. The creation of valuation ratios and metrics is the basic requirement for Enterprise value. Equity value, on the other hand, is a part of enterprise value that solely includes the portion of value that may be attributed to shareholders.

19. What does the word "goodwill" mean? How is it calculated?

Goodwill can be defined as an intangible asset. The worth of a company that is not reflected in its other assets and other liabilities is reflected in this account, which is created during an acquisition. 

Goodwill is computed by deducting the book value from the equity purchase price paid for the firm share. The goodwill should be paid back in full each period, according to accounting standards, nonetheless. The balance sheet of the business affects goodwill as well.

20. When should an Equity be issued by a company in place of Debt to finance its operation?

A firm will issue Equity in place of Debt for funding its operation in the following circumstances

• If the firm believes that there is inflation in stock price, the company may raise a significant amount of capital in comparison to the percentage of ownership sold. 
• In the event of the company planning to invest in new initiatives, the firm may not generate rapid or continuous cash flows to cover interest payments. 
• When a business seeks to pay down debt or modify its capital structure.
• When the proprietors of a corporation wish to sell off a portion of their holdings.

21. Explain in brief mergers and acquisitions?

The term "mergers and acquisitions" describes the combination of businesses or assets. It consists of a variety of activities, including mergers, acquisitions, consolidations, tender offers, asset purchases, and management acquisitions.

22. What exactly is a swap?

The term "swap" refers to the differential in loan interest rates between two currencies. When a client rolls over a trading position for the following day, money is either deposited or debited to the account. Both positive and negative things might happen in a swap.

23. What is the need for subtracting cash from the firm's value formula?

Cash is deducted from the enterprise value calculation because it is a non-operating asset. Cash is also usually included in the value of equity.

24. Describe Discounted Cash Flow.

Discounted cash flow (DCF) is a method of valuation used to determine how valuable an investment opportunity is. It can be carried out by discounting free cash flow predictions to obtain the present value. It is also employed to assess the prospects of a particular investment. if DCF analysis was used to arrive at the value. It typically costs more than the Investment's current cost.

25. Can you define leveraged buyout?

Leverage buyout is a term that describes the practice of using borrowed funds to acquire or stake in another company. The debt to equity ratio may reach as high as 90:10 in extreme circumstances.

26. Describe the fixed interest investment.

A long-term debt security is a fixed interest investment. It guarantees that all investments will be returned when they reach maturity.

27. What elements have an impact on a stock portfolio's health?

A stock portfolio's health is always impacted by and based on the stocks that make it up and how they are correlated. To safeguard their market portfolio, for instance, investors should look for stocks that are negatively correlated.

28. What are the common approaches for valuation?

There are three popular methods of valuation.

• Analyses of comparable companies
• Analysis of prior transactions
• Examination of discounted cash flows.

Scenario-Based Investment Banking Interview Questions

29. What draws you to investment banking?

The purpose of this question is to gauge the candidate's interest in and knowledge of investment banking. Hence, you should be aware of the essential qualifications and qualities needed for this position. You must make sure of stating why you believe you are an ideal fit for the job and position.

30. Can you name a few essential qualities that an Investment Banker must possess?

The following are a major skill sets one must possess to become an Investment Banker:

• Strong Analytical or Quantitative Skills
• Superior attention to detail
• Have solid work Ethic
• Excellent communication skills in all aspects- Written and spoken
• Ability to meet deadlines and manage multiple projects 
• A positive and resilient attitude
• Determinant
• Efficient time management
• Ability to learn quickly
• Capable of thinking out of the box

31. What long-term professional objectives do you as an investment banker have?

If you are prepared to work in this industry and are serious about your career, you will be asked this question. The Bank needs to employ a candidate who is prepared to work with the same Bank for a longer period because it is a financial position.

32. Can you share a little about the risk you have taken in your life?

Prospective candidates can answer this question by elaborating on their individual qualities as risk-takers. You may answer in the following line- I tend to be quite risk-averse and cautious by nature. That in no way implies, though, that I never take a chance. As a result, whenever I do take a gamble, it is always justified. It enables me to guarantee success and recognize the dangers involved before committing.

Most of the time, your job as an investment banker requires you to make difficult choices. Political and business developments should be taken into consideration before making a choice. You must therefore demonstrate your capacity for calculated risk-taking as well as sufficient analytical abilities.

Here, you should additionally emphasize the logical inferences you took when making any questionable decisions. Investment banking is not about accurate precision but rather being roughly right.

33. Can you highlight what a day in the life of an analyst as an Investment banker is?

The role of an analyst in Investment banking entails performing financial modeling, writing pitch books and fulfilling clients' requirements, and meeting with them. The working hours are rather long.

Those are the most often asked Investment banking interview questions that will help you immensely in facing an interview.  

Related Blog Post

120 Cyber Security Interview Questions & Answers

Top 80 Data Science Interview Questions & Answers

Top Data Science Interview Questions and Answers

Top Digital Marketing Interview Questions And Answers

Most Common Cloud Computing Interview Questions

Top Project Manager Interview Questions and Answers

Network Security Interview Questions and Answers

Top 30 Data Engineer Interview Questions & Answers

Top 20 Interview Asked Questions of AWS Architect Associate Exam 2021

Investment banking interview questions Investment Banking Interview Questions and Answers investment banking interview preparation investment banking interview guide