Investment Banking Interview Questions and Answers
Posted in Finance Articles, Total Reads: 1079
, Published on 11 December 2015
In this article we will have a look at Investment Banking Interview Questions. Investment banking is a specific division of banking which is related to the creation of capital for the government, other companies, and other entities. Investment banks are financial institutions which assists individuals, corporations & governments to raise financial capital by underwriting debt and equity securities for all types of corporations or acting as a client’s agent in the issuance of securities. It also helps facilitate mergers and acquisitions, broker trades for institutions and private investors and reorganisations. It also provides guidance to issuers regarding the issue and placement of stock.
2 main lines of business in investment banking are sell side and buy side. The “sell side” includes trading the securities for cash or for other securities or the promotion of securities. Facilitating transactions, market-making, underwriting and research are some types of the sell side entities. The “buy side” includes giving advise to institutions which are concerned with buying investment services. Mutual funds, private equity funds, unit trusts, life insurance companies, and hedge funds are the common types of buy side entities.
Sectors where this profile is prominent: Investment Banks, Financial Institutions
IB Profile Interview Questions:
1. Why should a company buy back stock?
When the company believes that the stock is undervalued and can make money by investing in itself. It can happen in a variety of situations. For example, if a company has suffered decreased earnings because of an inherent cyclical industry and its stock price is unjustifiably low, it will buy back its own stock. On other occasions, a company would buy back its stock if investors drive down the price precipitously.
2. Why would an investor buy preferred stock?
Reasons to buy preferred stock are –
1. An investor who wants upside potential of equity but wants to minimize risk will buy preferred stock. The investor will receive dividends from preferred stock that are more assured than dividends available from common stock
2. The preferred stock owner also gets a superior right to the company's assets when the company goes bankrupt
3. A corporation would prefer to invest in preferred stock as the interest rates on bonds is at a higher rate than the dividends on preferred stock
3. Difference between an acquisition and a merger
A merger occurs when two separate entities join forces to create a new organization. 2 companies consolidate their assets, management structures and hence form an organization. An example – Daimler-Chrysler
An acquisition refers to the takeover of 1 organisation by another. A new company does not emerge from an acquisition instead a smaller company is consumed by the bigger company. Its assets become a part of the bigger company. An example – Sun pharma acquiring Ranbaxy
Mergers are quite uncommon and acquisitions are taken in a negative view so hence the name M&A is used as a general term for both the things.
4. What is a green shoe option?
Green shoe option is an option of allocating shares in excess of the shares included in the initial public issue and thus operating a post listing pricing. Its a provision in an underwriting agreement that allows the underwriter to sell the additional shares than the original number offered. It is normally done to reduce the risk of the IPO.
5. As per you what are skills needed by an investment banker?
Some of the skills required by an investment banker are-
Intellect- An investment banker should be able to quickly break down the industry, market, and business ideas
Presentation and Communication Skills- The primary skill of investment banking is the ability to persuade and convince. He must be able to convince clients to buy-in to his ideas. These also include making good spreadsheets, documents, and slideshows.
Entrepreneurial- Investment banking involves helping a business build from scratch by funding a team of partisans, or spotting expansion or mergers opportunities within existing businesses. Lack of such skills will limit such business identifying potential.
Analytical skills - Analytical expertise is required by investment bankers with good quantitative abilities to present business plans with risk-returns strategies
Networking skills – Investment Bankers should present the ability to deal with unfamiliar situations and maintain healthy client relationships
6. If the U.S. dollar weakens, interest rates generally rise, fall or stay the same?
Rise. A weak dollar means that prices of imported goods will rise when measured in U.S. dollars i.e. it would take more money to buy the same goods. When the prices of imported goods rise, it contributes to higher inflation, which raises interest rates.
7. Can you explain how companies should plan mergers ?
First a company should identify the synergies of the 2 businesses. It also needs to ensure that the merger will not raise antitrust issues with Federal Trade Commission (FTC). For example, Apple and Microsoft should merge, but the combined company will have an unfair monopoly and the FTC will not approve the merger. Also the top people running the two companies don't like each other and would not want to merge.
8. Challenges faced by an Investment Bank
Some of the challenges faced by an investment bank are –
1 Cyber Crime- The IT systems of the investment banks are now the focus of criminals who can transfer millions of dollars within seconds to different accounts
2 Restructuring the Investment Bank- banks are pulling back to streamline flow of products, and looking towards technology platforms for answers
3 Improving Surveillance and Mitigating Conduct Risk- Regulators have become very thorough in terms of measuring, monitoring and mitigating different kinds of risks. People still look at this with skepticism
4 Sustainable Funding- Firms are investing their development dollars on cross product systems, trying to lower cost of complexity and custom systems
9. What is a leveraged buyout? How is it different than a merger?
A leveraged buyout occurs when a group, after refinancing a company with debt, is able to increase the valuation of the company. Either financial groups or company management typically accomplish LBOs, whereas M&A deals are led by companies in the industry.
10. Talk about Currency Devaluation and Revaluation
Under a fixed-exchange-rate system, where exchange rates are changed only by official government action, different terms are used. Instead of depreciation, weakening of the currency is called "devaluation." When a government devalues its currency, it is often because of the interaction of market forces & policy decisions that has made the currency's fixed exchange rate indefensible. Taking a recent example, devaluation is what occurred in Indonesia in 1998. The strengthening of the currency under fixed exchange rates is called revaluation.
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