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Want an I-Banking Job? Know the Answers to These Questions

While working at an investment bank may no longer be as prestigious and high-paying as it was years ago, the competition for open positions remains fierce, for both internships and full-time positions. To whittle down the select few who receive offers, investment banks are known for asking some of the most difficult interview questions you’ll hear.

Below is a sampling of some of the more interesting questions recently asked of M.B.A. graduates and prospective interns from New York University’s Leonard N. Stern School of Business. Test your skills and post your answers in the comment section.

1. Imagine that you cover an industrials company with $1 billion in revenue. News breaks that it is going to acquire a private company – all you know about the target is that it has roughly $500 million in revenue. Your phones start to ring immediately. On one line is your trader and on the other is your top institutional customer. First: Which phone do you answer and why. Second: How do you analyze the situation and what do you talk about?

2. Would a capital-intensive company look more or less expensive than a non-capital intensive company in terms of the EV/EBITDA ratio?

3, How do changes in interest rates impact duration?

4. How do you think you’ll handle the hours? Tell me about a time you’ve worked overtime?

5. If a company increases depreciation by $10, tell me how all three financial statements will be impacted?

6. If I were to ask your parents what they thought about you going into banking, what would they say?

7. On a football field, how are the different valuation ranges going to show up?

8. In a regular market, what is more expensive debt or equity? Explain your thought process.

9. Why is free cash flow called “free” cash flow? What does “free” signify?

10. What does F9 do in Excel?

11. What is the weakness of private equity valuation?

12, In a declining interest rate environment would you rather hold interest-only or principal-only?

13. If I am looking at a company in industry X and we want to determine how much leverage the company can withstand (to pay the shareholders a dividend) how would you determine the maximum amount of leverage for this corporation?

14. If you had an option to purchase an asset that was going to be worth either $100 or -$100 with equal probability (ignoring time to maturity and with a 0% interest rate) how much would you pay for that asset?

15. If you had a die with six sides and the strike price is three, how much would you pay for the option?

16. If the yield for a one-year bond is 10% and the yield for a two-year bond is 15%, what is the forward rate for the second year?

17. Does company-specific risk impact Beta? Why or why not?

For more brain teasers, check out our previous post on interview questions posed by consulting companies, as well another concentrating on asset managers, commercial banks, private wealth managers and other finance firms.

Comments (15)

Comments
  1. I worked in I-Banking for two years in the early 2000’s and can’t answer any of these with confidence anymore. Good information for anyone looking at getting into the industry. Gotta prepare yourself!

  2. 1. don’t know but instinct would tell me to answer the trader and ask them to forward info on the takeover and then hang up and answer the client, at least I would be able to tell the client I am working on it truthfully and not have them go elsewhere

    2. ev/ebitda is capital neutral so they’d be the same

    3. inversely, as yield increases, duration would decrease

    4.perfectly fine, I’m unemployed and only get 5 hours sleep anyway, might get more if i was working

    5. assets on B/S decrease, income statement expense increases, cash flow is unaffected

    6. they would say any job is better than no job as long as I’m keeping my dignity

    7. no idea what this Q is asking

    8. in terms of the company issuing, debt is less expensive, it is tax deductible and more senior in liquidation so less risky and there requires less return from investors

    9. FCF is cash available to the security holders of a company, the free implies it is accessible (as capex has been deducted)

    10. recalculates all cells

    11. based on estimates, true market values aren’t known until it’s sold

    12. principal only, yield is dependent on prepayment speed and will increase if interest rates decrease

    13. dividend cover ratio – eps/dps – anything over 1 is ok, 2 is safe

    14. I wouldn’t, mathematically I should take it for free but prospect theory states I should be paid to take the asset

    15. assuming it’s a call option, expected payoff is 3, so I’d pay anything less

    16. assuming zero coupon, it’s 4.5%

    17. no, company specific risk by definition is diversifiable risk and shouldn’t affect a diversified portfolio beta

    I’m an unemployed post grad with cfa level 1 pass. Why won’t anyone hire me :(

  3. 1. don’t know but instinct would tell me to answer the trader and ask them to forward info on the takeover and then hang up and answer the client, at least I would be able to tell the client I am working on it truthfully and not have them go elsewhere

    2. ev/ebitda is capital neutral so they’d be the same

    3. inversely, as yield increases, duration would decrease

    4.perfectly fine, I’m unemployed and only get 5 hours sleep anyway, might get more if i was working

    5. assets on B/S decrease, income statement expense increases, cash flow is unaffected

    6. they would say any job is better than no job as long as I’m keeping my dignity

    7. no idea what this Q is asking

    8. in terms of the company issuing, debt is less expensive, it is tax deductible and more senior in liquidation so less risky and there requires less return from investors

    9. FCF is cash available to the security holders of a company, the free implies it is accessible (as capex has been deducted)

    10. recalculates all cells

    11. based on estimates, true market values aren’t known until it’s sold

    12. principal only, yield is dependent on prepayment speed and will increase if interest rates decrease

    13. dividend cover ratio – eps/dps – anything over 1 is ok, 2 is safe

    14. I wouldn’t, mathematically I should take it for free but prospect theory states I should be paid to take the asset

    15. assuming it’s a call option, expected payoff is 3, so I’d pay anything less

    16. assuming zero coupon, it’s 4.5%

    17. no, company specific risk by definition is diversifiable risk and shouldn’t affect a diversified portfolio beta

    I’m an unemployed post grad with cfa level 1 pass. Why won’t anyone hire me :(

  4. to Q # 16: I think f for year two is 20,23%, isn´t it?

  5. ^^^ you’re hired. Come to Blackstone’s offices, Monday 11th of Feb, 10:00 and ask for Steve, Steve Schwarzman. Looking forward to working with you.

    – Blackstone HR

  6. the foward rate for the second year is 20,23%, isn´t it?

  7. Good news, Adam! Congrats! If another job is available … please let me know

  8. @StMarkus: You’re right about Q16), it’s 1.15^2/1.1 – 1 = 20.23%

    Q14) Since it is an option which you don’t have to exercise, it would be worth 50% * $100 = $50

    Q15) Assuming all sides have equal (riskfree) probability it would be (6-3)/6 + (5-3)/6 + (4-3)/6 = 1

  9. Thank you for confirmation, Frank! So, where are the companies which are hiring …?

  10. 15. the trick is the strike is 3, which is not the “center” of the roll distribution, it is less. Since the payoffs on rolls equlling 1…6 are (-2, -1, 0, 1,2,3) the weighting implies the option is worth 3.50. You would probably pay up to $3.50 with parity being $3.50.

  11. 15. The expected outcome on a fair die is 3.5 (1+2+3+4+5+6) / 6 = 3.5. So if you toss a die 1000 times the expected outcome on avarage will be 3.5, while the strike is 3. The option price should be 0.5, for your expected profit to be 0.

    Call premium not exceeding .5 will translate in an expected profit, otherwise you will expect a loss.

    Call Premium = Spot – strike = 3.5 – 3 = .5

    16. (1+R1)(1+1f1) = (1+E2)^2 1f1 = [(1.15)^2 / 1.1] – 1 = 20.33%

  12. @StMarkus – Yeah you’re right the answer is 20.23, I forgot to square root the 1.15

    @Frank – I read “option” as “choice”, so there haven’t treated the question as a call option, Although I agree with your answer of 50 if it is a call option

    @Callput, I’m going to stick with my answer of anything less than 3 here, you’ll only exercise the option if the die lands on 3 or above. (3 + 4 + 5 + 6) * 1/6 = 3. So your payoff is 3, but remember you’re paying for the option in the first place so if you’re paying $3 for the option and probably only receiving $3 back then what’s the point. Hence anything less than 3

  13. @ Stan: solution for the problem is correct, but forward rate is 20.23% (by recalculation), 20.33% must be a typo

  14. Actually.. payoff on q15 is indeed 1.. I treated the payoff as obtaining an asset worth the number the die landed on for some strange reason :S that’s what I get for not using a pen & paper.. so 1 would be the arbitrage-free price

  15. 1. Generally there should be a more interaction with customers who transact more with the company. Attending the call will depend upon the more number of transactions that had taken earlier with the company and other circumstances.
    The target company revenue is 50% of the acquiring co and there will be huge impact on EPS and value of the company. so If the news does not disclose the target revenue it might be come under price sensitive information, hence such information should not be disclosed to third parties. I will talk with them only regarding the facts of the news and not interpretations.
    2. EV/EBITDA ratio is used to compare the value of companies with in the same industries. Therefore, the EV/EBITDA ratio may not give reliable conclusions when comparing different industries.
    3. There is inverse relationship between Duration and Interest.
    8. with respect to company debt is less expensive than equity. Generally Debt holders will be paid first, later the remaining earinings will be distributed to the equity holders. Moreover it is mandatory to pay interest on debt but not dividends. since equity holders assuming more risk than debt holders their expectation on return will be higher than the debt holders hence equity is more expensive.
    9. Free cash flows are cash flows that are available after meeting capital expenditure as well as changes in working capital requirements. Free signifies the cash flows that are available for distribution to share holders.
    11. There will be less or no active market for determining the value of some of the private equities. It depends on the judgement and estimations of the valuer.
    14. The expected value of the asset will be zero. Hence nothing to pay. However an asset cannot be acquired free of cost.
    15. 3 or less (assuming it as a call option)
    16. 20.23%
    17. Beta represents market risk i.e., undiversified risk whereas company risk is diversified risk. Hence company specific risk will not impact beta of a company.

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