Investment Banking Interview Questions With Answers Part One

Investment Banking Interview Questions With Answers - Part One

When preparing for an investment banking interview, it is crucial to be well-versed in a variety of topics to showcase your knowledge and skills. This first part of the interview questions series will cover fundamental inquiries that are commonly asked during these interviews. By understanding and practicing responses to these questions, you can demonstrate your preparedness and suitability for a career in investment banking. One of the typical questions you may encounter is related to your understanding of financial statements and their importance in the investment banking field. Being able to explain the components of financial statements, such as the balance sheet, income statement, and cash flow statement, will showcase your financial acumen. Additionally, you might be asked about your knowledge of valuation methods used in investment banking. Understanding concepts like discounted cash flow (DCF) analysis, comparable company analysis, and precedent transactions analysis is essential for evaluating and valuing companies accurately. Furthermore, questions about your understanding of mergers and acquisitions (M&A) could arise during the interview. Demonstrating your knowledge of the M&A process, including due diligence, valuation, negotiation, and integration, will highlight your comprehension of this critical aspect of investment banking. By delving into these topics and practicing your responses, you can enhance your readiness for investment banking interviews and increase your chances of impressing potential employers with your expertise and knowledge. Stay tuned for more insightful interview questions and answers in the upcoming parts of this series.

Questions asked for Investment Banking Role

Q1- Which cryptocurrencies want to invest and why?

Suggested Answer: I may want to put their money into a number of different cryptocurrencies. Some of the most well-known are Bitcoin, Ethereum, and Litecoin. People might want to invest in these currencies if they think their value will keep going up in the future. Also, these currencies can be used to buy goods and services online, which may make them more valuable in the future.

Q2- Did you will advice to your client to invest in crypto currencies and why ?

Suggested Answer: I would tell my client to invest in crypto currencies because they are a new and exciting asset class that has the potential to give high returns. Also, they are not controlled by the government or financial institutions because they are not centralised. This can make them unstable.

Q3- What kind type to buy a stock and why ?

Suggested Answer: I would buy a company's stock if I thought it was undervalued and could grow. The company should have a good group of people in charge and a good track record with money. I'd buy the stock because I think it's a good way to put money to work and could lead to capital gains.

Q4- what do you think about the current market, weather it will bearish or bullish and why ?

Suggested Answer: This question doesn't have a single clear answer. Some people think the market is bearish right now, while others think it is bullish. This difference of opinion is probably due to the way politics and the economy are right now. Some people might feel bullish about the market because the Biden administration has recently passed policies that are good for business, while others might feel bearish because they are worried about a possible trade war. At the end of the day, it's up to each investor to make his or her own decision about the market and how it will act in the future.

Q5- Did you think the if covid arise then which sector getting highly impacted?

Suggested Answer: If you agree with my point of view, the COVID pandemic is having a very positive effect on the medical field.

Q6- What happening in Asian stock market specially in Japan?

Suggested Answer: The Japanese stock market is a place where a lot of guessing goes on. Many people think that the stock market is overvalued and that it is only a matter of time before it crashes.

Q7- Explain me the BS/IS and CF ?

Suggested Answer: A financial statement known as a balance sheet details a company's assets, liabilities, and shareholders' equity as of a particular point in time. A company's income statement details the amount of money it generated during a particular time period as well as the costs it incurred during the same time period. A statement of cash flow provides information about how much cash a company has made and how much cash it has utilised over a certain time period.

Read more on Financial Statement Analysis

Q8- What news you read today and how does that affect the market?

Suggested Answer: The news that was read today included such items as OPEC's decision to extend their production cutbacks, Facebook's announcement that they will be laying off some of their employees, and China's decision to place a rigorous lockdown on their internet censorship.

Q9- Have you seen anything interesting happen in the market today?

Suggested Answer: I noticed that quite a few stocks went up today.

Q10- Walk me through a dcf

Suggested Answer: A calculation known as a discounted cash flow is one that determines the present value of a series of future cash flows by discounting those cash flows. The time value of money, or the concept that a dollar received now is worth more than a dollar received tomorrow, is factored into the equation. The first thing you need to do in order to compute discounted cash flow is to calculate the cash flows that will occur in the future. This may entail projecting the returns on an investment or estimating the revenues and costs of a business over a specified period of time. Additionally, this may involve both of these activities. The next thing that you need to do is discount each of the future cash flows by applying a rate that takes into account the fact that time is more valuable than money. This rate may be calculated using the current interest rates on the market, or it may be calculated using the rate of return that is anticipated for the investment. In order to get at the present value, the very last thing you need to do is add up all of the cash flows that have been discounted.

Q11- Briefly describe how DCF works? and what is pros and cons of DCF

Suggested Answer: The worth of a firm can be calculated using the process of financial modelling known as discounted cash flow, which involves bringing a company's future free cash flows back to the present and applying a discount rate. The benefits of using discounted cash flow as a method of valuation include the fact that it is an extremely strong and trustworthy technique that takes into account a wide variety of elements, such as the time value of money. The drawbacks of using discounted cash flow include the fact that it is sometimes difficult to calculate and is sometimes sensitive to the assumptions that are made regarding future cash flows.

Q12- Tell me what is P/S ratio ?

Suggested Answer: The Price to Sales ratio, also known as the P/S ratio, is a method of determining how much it would cost to buy all of a company's sales. It is determined by dividing the current market value of a company's shares by the sum of the company's revenues for the most recent twelve-month period. This statistic is used to compare organisations operating in various industries to one another in order to determine which ones have higher costs.

Read more on Valuation

Q13- Explain me the alternative asset space?

Suggested Answer: Alternative assets refers to investments such as private equity, hedge funds, venture capital, and any other type of asset that is not traded on a public exchange.

Q14- What do you do when a client go against company policy? and how you deal with that?

Suggested Answer: If a client breaks a company rule, you should write down what happened and tell your boss about it. Depending on how bad the situation is, you may need to do something else, like close the client's account or take other type of action as per compliance policy.

Q15- If you had $1,000,000, which company would you lend to in, Apple or Facebook?

Suggested Answer: Apple is a more stable and profitable company, so I would lend them money. I won't recommend Facebook because its number of users is going down and it's making less money.

Q16- If two companies have the same earnings the how you will value?

Suggested Answer: From a quantitative point of view, you should look at the cash flow stream's growth rate and size. Value goes up when growth is faster and cash flows are bigger.

Then you should look at the amount of debt and see if it poses a risk to cash flows.

Qualitatively, look at what the management brings to the table, if there are concentrations in the customer base, vendor base, geography, etc., and so on.

Q17- What is organic growth in company

Suggested Answer: Organic growth is when a company's operations grow gradually as it gets more customers and becomes more successful. This can be done in many ways, such as by selling more to current customers, making more products, or going into new markets.

Q18- How would you invest 1 million dollars? What will your strategy?

Suggested Answer: When it comes to investing $1 million, you can do a few things. You could invest in stocks or mutual funds as one choice. You could also put your money into real estate investment trusts or other types of tangible assets. A third choice is to put money into a business. The best way to invest $1 million will depend on the person's goals and willingness to take risks.

Q19- What are the main methods of valuation?

Suggested Answer: The two primary approaches to valuing anything are called intrinsic and relative. The relative valuation of a firm compares it to others in the same sector, while the intrinsic valuation investigates the company's value in relation to its core operations.

Q20- Walk me through a DCF? Do you think DCF is reliable

Suggested Answer: A discounted cash flow analysis, also known as a DCF analysis, is a method for estimating the prospective worth of an investment or firm by applying a discount to the sums of cash that are anticipated to be received in the foreseeable future. The basic premise of a discounted cash flow (DCF) analysis is that a dollar received or earned today is worth more than a dollar received or earned tomorrow. This is due to the fact that a dollar received or earned today can be invested and earn interest on it, whereas a dollar received or earned tomorrow cannot. We employ a discount rate that reflects the riskiness of the future cash flows in order to compute their present value. This rate is called the risk cash. In most cases, a larger discount rate will result in a lower value at the current point in time. The most dependable component of discounted cash flow is the estimation of future cash flows. As a result of the subjectivity of the assumptions that underlie these cash flows (for example, growth rates, profitability, and so on), several analysts may arrive at significantly different valuations for the same firm or investment. The DCF analysis, on the other hand, will give you a good estimate of the potential value of an investment or company so long as the analyst uses a reasonable discount rate and makes reasonable assumptions about future cash flows. In other words, if the analyst follows these two guidelines, the analysis will be accurate.

Q21- How you will analyze trends in the an industry?

Suggested Answer: There are a number of different approaches to analysing trends in a sector. Examining financial statements, carrying out polls or focus groups, and keeping up with the latest industry news are some of the more common approaches.

Q22- What are options?

Suggested Answer: Options are a type of financial derivative that provide the buyer with the right, but not the obligation, to buy or sell the underlying asset at a predetermined price within a predetermined amount of time.

How would you build a portfolio for the client ?

Because the creation of the portfolio is dependent on the individual customer and the investing objectives they wish to achieve. On the other hand, the following are some suggestions for how to construct a portfolio for a client:

1. Determine the client's comfort level with taking risks and their long-term investing objectives.

2. Take into account the client's age, income, and time horizon for making investments.

3. Choose a variety of asset classes for the client's portfolio that corresponds to their risk tolerance and the goals they want to achieve.

4. Maintain a healthy balance between the portfolio's potential for development and its desire for stability by investing in both equities and bonds.

5. Instead of buying individual stocks or bonds, consider using exchange-traded funds (ETFs) and mutual funds to acquire exposure to a diverse range of assets.

Q23- what kind of asset would you recommend me for invest? and why?

Suggested Answer: Putting money into a mutual fund is something I strongly suggest you do. A mutual fund is a pool of capital that is collectively invested and managed by a single investment management firm. Common types of mutual funds include cash, stocks, and bonds. A diverse portfolio that provides investors with both stability and opportunity for growth is what a mutual fund should strive to achieve as its primary objective.

Q24- How you will construct a pure volatility portfolio?

Suggested Answer: You will need to begin by calculating the standard deviation of the returns for each security in your portfolio before you can move on to the next step of building a pure volatility portfolio. After you have determined the standard deviation for each security, you will need to assign a weight to each security based on the contribution it makes to the portfolio's overall volatility. The very last thing that needs to be done is to calculate the variance of the portfolio, after which you will deduct the variance of each individual security.

Q25- Imagine if you are a financial sponsor and you buy a company for $700 M and sell the same company a 3 years later for $700 M, do you make any money from this company?

Suggested Answer: As a sponsor would not make any money from the company.

Q26- Tell me the main difference between an SMA and a mutual fund?

Suggested Answer: The investor in a separate managed account has a direct interaction with the money manager who handles the account, which is the primary distinction between a separate managed account and a mutual fund. When an investor chooses to participate in a mutual fund, he or she does so by purchasing shares in the fund, which are then overseen by a qualified professional money manager.

Q27- walk me through some basic income statement calculations?

Suggested Answer:

Gross Profit = Revenue – Cost of Goods Sales (COGS)

Operating profit = Earnings before Interest & Tax (EBIT) = Sales – COGS – Operating expenses

Net Profit = Revenue – Total Expenses

Q28- How depreciation can be effect the financial statements?

Suggested Answer: Depreciation can affect a company's financial statements by lowering net income and raising expenses. This can cause the company to make less money and have less money to put back into the business or give to shareholders as dividends.

Q29- What happens to the WACC of a company if debt getting rise?

Suggested Answer: If a company's debt goes up, the WACC will go up as well.