Investment Banking Graduate Analyst: 20 Technical Interview Questions

Congratulations!

You’ve landed an interview for a graduate analyst position at an investment bank.  Now comes the hard part: preparing for the interview.

You will usually have a HireVue interview to begin. Then you’re going to face some technical questions so you may be thinking…

What technical questions will they ask me for my Investment Bank Analyst position?

1. What is the difference between a bond and a stock?
2. How do you value a company’s stock?
3. What is the yield curve, and what does it represent?
4. How do you calculate a company’s weighted average cost of capital (WACC)?
5. What is a merger and acquisition (M&A), and how does it work?
6. How do you calculate enterprise value (EV) and equity value (EV)?
7. What is a leveraged buyout (LBO), and how does it work?
8. What is the difference between a forward and a future contract?
9. What is a swap, and how does it work?
10. What is a derivative, and how is it used in finance?
11. What is the Black-Scholes model, and how is it used?
12. What is the efficient market hypothesis, and how does it relate to the stock market?
13. How do you calculate beta, and what is its significance in finance?
14. What is a dividend, and how is it paid to shareholders?
15. What is a mutual fund, and how does it work?
16. What is a hedge fund, and how is it different from a mutual fund?
17. What is the difference between investment banking and commercial banking?
18. How do you analyse financial statements, such as income statements and balance sheets?
19. What is the importance of cash flow in financial analysis?
20. How do you assess a company’s risk profile, and what factors do you consider?

Here are some sample answers to technical interview questions asked for graduate analyst positions in investment bank.

These answers need you to give a real world example of each to get high marks.

1. What is the difference between a bond and a stock? A bond is a debt security that represents a loan made by an investor to a borrower, while a stock represents ownership in a company. Bonds typically pay a fixed interest rate, while stocks may pay dividends or appreciate in value.
2. How do you value a company’s stock? There are several methods to value a company’s stock, including the price-to-earnings (P/E) ratio, discounted cash flow (DCF) analysis, and relative valuation. P/E ratio compares a company’s stock price to its earnings per share (EPS), while DCF analysis calculates the present value of expected future cash flows. Relative valuation compares a company’s stock to similar companies in the same industry.
3. What is the yield curve, and what does it represent? The yield curve is a graph that plots the yields of bonds with different maturities. It represents the relationship between the interest rate and time to maturity. A steep yield curve indicates that investors expect higher interest rates in the future, while a flat or inverted yield curve indicates a potential economic slowdown.
4. How do you calculate a company’s weighted average cost of capital (WACC)? WACC is the average cost of all of a company’s capital, including debt and equity. It is calculated by multiplying the cost of debt by the weight of debt, adding the cost of equity by the weight of equity, and summing the two values.
5. What is a merger and acquisition (M&A), and how does it work? M&A is a corporate strategy where two companies combine or one company acquires another. The purpose is to achieve economies of scale, diversify the business, or gain access to new markets or technology. M&A can be accomplished through a stock purchase, asset purchase, or merger.
6. How do you calculate enterprise value (EV) and equity value (EV)? Enterprise value represents the total value of a company’s operations, including debt and equity, while equity value represents the value of a company’s equity. To calculate EV, add the market value of debt, market value of equity, and any minority interest and subtract cash and cash equivalents. To calculate equity value, subtract the market value of debt and add cash and cash equivalents.
7. What is a leveraged buyout (LBO), and how does it work? LBO is a financial transaction where a company is acquired using a significant amount of debt financing. The purpose is to increase the return on investment by using the target company’s assets as collateral for the debt. The debt is typically paid off using the cash flow from the target company’s operations.
8. What is the difference between a forward and a future contract? Both forward and future contracts are agreements to buy or sell an asset at a future date and price. The main difference is that forward contracts are customized agreements between two parties, while future contracts are standardized agreements traded on an exchange.
9. What is a swap, and how does it work? A swap is a financial agreement between two parties to exchange cash flows based on different financial instruments. For example, one party may agree to exchange a fixed interest rate for a variable interest rate with another party.
10. What is a derivative, and how is it used in finance? A derivative is a financial instrument whose value is derived from an underlying asset, such as stocks, bonds, or commodities. Derivatives can be used for risk management or speculation, such as hedging against a price change or taking a position on the direction of the market.

11. What is the Black-Scholes model, and how is it used? The Black-Scholes model is a mathematical formula used to calculate the theoretical price of European call and put options, based on several factors such as the stock price, strike price, time to expiration, and volatility. The model is widely used by options traders and investors to determine the fair value of options.
12. What is the efficient market hypothesis, and how does it relate to the stock market? The efficient market hypothesis (EMH) is a theory that states that the stock market reflects all available information, and therefore it is impossible to consistently beat the market by picking stocks or timing trades. EMH has implications for investors, as it suggests that it may be more effective to invest in low-cost index funds than to try to beat the market through active trading.
13. How do you calculate beta, and what is its significance in finance? Beta is a measure of a stock’s volatility compared to the overall market. It is calculated by dividing the covariance of a stock’s returns with the market returns by the variance of the market returns. Beta is used to assess a stock’s riskiness and is a key factor in calculating a company’s cost of capital.
14. What is a dividend, and how is it paid to shareholders? A dividend is a payment made by a company to its shareholders, typically out of its profits or reserves. Dividends can be paid in cash, stock, or other forms, and are usually distributed on a regular basis, such as quarterly or annually.
15. What is a mutual fund, and how does it work? A mutual fund is a type of investment vehicle that pools money from many investors to purchase a portfolio of stocks, bonds, or other securities. Mutual funds are professionally managed and offer investors the benefits of diversification, liquidity, and access to a wide range of investment options.
16. What is a hedge fund, and how is it different from a mutual fund? A hedge fund is a type of investment fund that is less regulated than mutual funds and typically caters to high net worth investors. Hedge funds may use a variety of investment strategies, such as short-selling, leverage, and derivatives, to generate higher returns, but also carry higher risks than mutual funds.
17. What is the difference between investment banking and commercial banking? Investment banking focuses on providing financial advisory services to corporations, governments, and other institutions, such as mergers and acquisitions, underwriting securities offerings, and managing investment portfolios. Commercial banking, on the other hand, focuses on accepting deposits, making loans, and providing other financial services to individuals and small businesses.
18. How do you analyse financial statements, such as income statements and balance sheets? Financial statements provide important information about a company’s financial performance and position. Analysts use various ratios and metrics, such as earnings per share, price-to-earnings ratio, debt-to-equity ratio, and return on assets, to assess a company’s financial health and growth prospects.
19. What is the importance of cash flow in financial analysis? Cash flow represents the inflow and outflow of cash in a business, and is an important measure of a company’s ability to generate cash from its operations. Positive cash flow can help a company meet its financial obligations, invest in growth opportunities, and return value to shareholders.
20. How do you assess a company’s risk profile, and what factors do you consider? Assessing a company’s risk profile involves analysing various factor such as its financial leverage, market volatility, regulatory environment, competitive landscape, and macroeconomic conditions. Factors that can increase a company’s risk include high debt levels, dependence on a single customer or supplier, exposure to currency fluctuations or commodity prices, and legal or regulatory uncertainties. Analysts use various methods, such as stress testing, scenario analysis, and sensitivity analysis, to assess a company’s risk profile and identify potential risks and opportunities.

If you’re preparing for a graduate analyst position in an investment bank, it’s important to have a solid understanding of basic financial concepts and their practical applications.

Be sure to review and practice answering technical questions related to accounting, economics, financial markets, and investment products, as well as demonstrate your ability to analyse financial statements, assess risk, and communicate effectively.

With the right preparation and positive attitude, you can stand out from other candidates and WIN your role as a finance professional.

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