The three styles of interview questions asked by investment banks

by Beecher Tuttle 28 March 2014

As we mentioned last week, we recently came across an old investment banking recruitment guide from UBS. While its from 2010, there are a number of useful tips that can help win over any bank in the recruitment process. Theres even a section that includes actual interview questions. As youll see, banks mix in theory, fit and more general inquiries fairly evenly. Youll need to be well rehearsed at answering all three. And as you can tell from the last line of questions, keeping up with the industry news is critical. Fit Questions What three adjectives would your peers, superiors and subordinates use to describe you? What is the greatest risk we face in hiring you? Do your grades reflect your abilities? What electives have you taken outside of finance and accounting? How do you know you will be able to handle the hours required of an investment banker? Do you consider yourself a risk-taker? Theory Questions Draw the yield curve Show how convexity impacts a bonds price to yield relationship Discuss different accounting treatments for different securities (e.g. available-for-sale)

Where do deferred tax liabilities come from? Give an example What type of a company would be a good candidate for an LBO? General inquiries Where did the Dow, S&P and NASDAQ close yesterday? What are three major news items related to the industry in which you are interested? What is the most interesting article you read in the WSJ of late? Tell me about a recent IPO you followed Describe a recent M&A transaction you read aboutwhat were the reasons they merged?

The six most common investment banking interview questions and how to answer them
by Beecher Tuttle 18 March 2014

For recent graduates, investment banking interviews are built on two main structures: personal behavioral questions and technical queries. As were told, the latter tend to be rather formulaic. There are only so many technical questions an interviewer can ask. Still, the questions can be answered in many different ways. Like case studies, its often more about how you explain your logic. Below are six questions commonly asked in investment banking interviews, along with potential answers put together by a business school graduate now working on Wall Street. How did they do? Let us know in the comments.
Define Beta for a layman

Beta tells you how much the price of a given security moves relative to movements in the overall market. A Beta of 1 means that if the market moves, the stock moves in unison with the market. A Beta < 1 means that if the market moves a certain amount, the stock will move less than that amount A Beta >1 means that if the market moves a certain amount, the stock will move more than that amount.
What is CAPM?

CAPM is the Capital Asset Pricing Model, and it is a model designed to find the expected return on an investment and therefore the appropriate discount rate for a companys cash flows. It is a linear model with one independent variable: beta.

CAPM divides the risk of holding risky assets into systemic and specific risks. To the extent that any asset is affected by general market moves, that asset entails systematic risk. Specific risk is the risk which is unique to an individual asset. It represents the component of an assets volatility which is uncorrelated with general market moves. According to CAPM, the marketplace compensates investors for taking systematic risk, but not specific risk. CAPM considers a simplified world in which there are no taxes or transaction costs. All investors have identical investment horizons. All investors have identical perceptions regarding the expected returns, volatilities and correlations of available risky investments. Formula: Ri = Rf + Beta * (MRP) Rf = riskfree rate (use 10year Treasury) MRP = Market Risk Premium (Rm Rf) Rm = Expected Return of Market
Of the three main valuation methods (DCF, public comparables and transaction comparables), rank them in terms of which gives you the highest price? Which one yields the highest valuation?

Simple answer: It depends. Depends on discount rate in DCF model, depends on the comparable companies used, depends on whether the market is hot/cold and the companies are overvalued/undervalued for no good reason. Generally, however, transaction comps would give the highest valuation, since a transaction value would include a premium for shareholders over the actual value. The second highest valuation would probably be the DCF, since there are a lot more assumptions that are involved (growth rate, discount rate, terminal value, tax rates, etc.), but it can also be the most accurate depending on how good the assumptions are. Trading comps offer the least wiggle room and will solely depend on the choice of companies and how the market treats them.
If you had to pick one statement to look at (balance sheet, cash flow, income statement), which one would it be and why?

No right answer. Can go with whichever one you like. Each has its advantages. Income statement shows the profitability of a company, trends in sales/expenses margins, etc.; balance sheet is a great way to see what items make up the companys assets and whom the company needs to pay back for those assets. Personally, I would go with cash flow statement. At the end of the day, cash is king. A company that has positive income but very little cash is in deep trouble. Cash flows are used for DCF models, not net income. The cash flow statement allows observing important performance metrics from both income statements and balance sheets such as net income, depreciation, sources and uses of funds, changes in assets and liabilities.

What is the difference between commercial and investment banking?

There are many definitions, but these are some of the broader ideas that differentiate the two: Commercial bank: accepts deposits from customers and makes consumer and commercial loans using these deposits. The vast majority of loans made by commercial banks are held as assets on the banks balance sheet. Investment bank: acts as an intermediary between companies and investors. Does not accept deposits, but rather sells investments, advises on M&A, etcloans and debt/equity issues originated by the bank are not typically held by the bank, but rather sold to third parties on the buy side through their sales and trading arms.
What is accretion and dilution? Give an example

Accretion is asset growth through addition or expansion. Accretion can occur through a companys internal development or by way of mergers and acquisitions. Dilution is a reduction in earnings per share of common stock that occurs through the issuance of additional shares or the conversion of convertible securities. Adding to the number of shares outstanding reduces the value of holdings of existing shareholders. An acquisition is accretive when the combined (pro forma) EPS is greater than the acquirers standalone EPS. For example, suppose analysts expect Procter & Gambles EPS to be $3.05 next year. You are a banker charged with the task of modeling the impact to Procter & Gambles EPS if they were to acquire Colgate-Palmolive (this is purely hypothetical by the way). So you build your model and determine that the pro form EPS next year would actually be $3.10 $0.05 higher than had the acquisition not taken place. In other words, the deal would be $0.05 accretive next year. An acquisition is dilutive if the opposite is determined: that pro forma EPS would be lower than $3.05. A deal is considered breakeven when there is virtually no impact on EPS. Accretion: When pro forma EPS > Acquirers EPS Dilution: When pro forma EPS < Acquirers EPS Breakeven: No impact on Acquirers EPS

How to ace an investment banking interview, courtesy of UBS

by Beecher Tuttle 21 March 2014 2 Comments Recent Comment Excellent tips! Posted by anonymous

Scouring the bowels of the Internet for other research, we came across an old gem. Someone has uploaded UBSs 2010 investment banking recruiting guide for MBAs. While it was first put together four years ago, the interview advice thats included is timeless. Its rather long almost 100 pages so we put together a few notes that we found most interesting. Things to mention during the interview

Mention the names of other bankers whom you have met and done informationals Names of all other banks with which you are in final rounds or have gotten offers Tell your story of why you want to do investment banking Drop names of prominent deals the bank has done Show you have done your homework and know the banks strengths

The first two pieces of advice are rather interesting. Is it really to your benefit to have banks know where else you are looking and whom else youve spoken to, or is simply helpful for UBS? Id venture to say the latter. Telling your story

This is something MBAs are trained to do. Come in with a story about why you want to work in investment banking that highlights previous experience that would make you a suitable candidate. Here are a few bits of advice on how to pull that off, courtesy of UBS.

Pick relevant time frames. Have different length versions of your story, but be sure to include the most im portant points or themes in each version. Your story should flow with your resume, but you should not be re-hashing your resume. Dont read off of your resume or pause to refer to it when interviewing. Keep your story consistent. Your story should always answer why banking? If you mention it or list it on your resume, its fair game. Practice, practice, practice!

Skills to showcase This section can be helpful for interviews as well as when putting your resume together. Here are the soft skills investment banks want you to showcase.

Academic excellence Relevant business experience Demonstrated leadership experience Demonstrated work ethic Interviewing skills Computer competency Analytical skills Problem solving/modeling Perceived client relationship skills Know why you want to be a banker (story) Know why you want to be at that bank