# Interview Question and Answer Tips for aceing your Investment Banking Interview

## What will influence the price of residential mortgage-backed security?

The price of a residential mortgage-backed security (RMBS) is influenced by several factors, including:

The creditworthiness of the underlying mortgages: RMBS are backed by a pool of mortgages, so the creditworthiness of the borrowers will have an impact on the price of the security.

Interest rates: When interest rates rise, the value of RMBS may decrease because the cash flows generated by the underlying mortgages will be worth less.

Prepayment risk: RMBS are sensitive to the risk that borrowers will prepay their mortgages, which can result in lower cash flows for the security.

Market conditions: Economic conditions and market sentiment can also affect the price of RMBS.

The spread of the underlying mortgages: The spread of the underlying mortgages can also affect the price of the security.

The quality of the underlying mortgages: The quality of the underlying mortgages can also affect the price of the security, as the securities with high-quality mortgages will command a higher price than those with low-quality mortgages.

## Can you make a forward FX model for GBP/USD?

To create a forward FX model for GBP/USD, you would need to follow these steps:

Collect historical data: Gather historical data on the exchange rate between GBP and USD, as well as other relevant economic data such as interest rates, GDP, and inflation.

Choose a model: Decide on the model that you will use to forecast the future exchange rate. Some common models used for FX forecasting include the random walk model, the mean reversion model, and the ARIMA model.

Estimate the parameters: Estimate the parameters of your chosen model using the historical data.

Test the model: Use out-of-sample data to test the accuracy of your model's predictions.

Make your forecast: Once you have a model that you are satisfied with, use it to make a forecast for the future exchange rate between GBP and USD.

Update and monitoring: Monitor the model performance, update your model with the latest data and repeat the process to ensure the model is working well and to refine the predictions.

It's worth noting that FX forecasting is a complex task and can be affected by several factors, so creating a model that can perfectly predict the future exchange rate is not guaranteed. Even the best models will have some level of error and it's important to remember that forward FX models are just one tool to guide the decision-making process, not the only one.

## Tell me how you calculate the delta of an option without using the precise formula for delta? How?

The delta of an option is a measure of how the option's price will change in response to a change in the price of the underlying asset. There are several ways to calculate the delta of an option without using the precise formula, such as:

Numerical approximation: One way to calculate the delta of an option is through numerical approximation, using a technique called finite difference. This involves computing the option's price for a small change in the underlying asset's price and using this to estimate the delta.

Implied volatility: Another way to estimate the delta of an option is by using implied volatility. Implied volatility is the volatility of the underlying asset that is implied by the option's price. By using implied volatility, you can estimate the delta of an option even if you don't know the underlying asset's price.

Delta hedging: A delta-hedging strategy can also be used to estimate the delta of an option. This involves buying or selling the underlying asset in an amount that is proportional to the option's delta, in order to offset the risk of the option's price changing. By tracking the changes in the underlying asset's price, you can estimate the delta of the option.

Binomial models: Another method to estimate the delta of an option is by using binomial models, which are a simple way to model the evolution of the underlying asset's price over time. By using a binomial model, you can estimate the option's price for different underlying asset prices, and then use this to estimate the delta.

It's important to note that these methods are approximations, and the delta calculated from these methods may not be as accurate as the delta calculated using the precise formula, but it can be useful for a quick estimate or for a general understanding of the option's price sensitivity.

## Explain a credit default swap with examples?

A credit default swap (CDS) is a financial contract that allows an investor to transfer the credit risk associated with a bond or other debt instrument to another party. The buyer of a CDS pays a regular fee, called the "spread," to the seller in exchange for a payout if the issuer of the underlying debt defaults on their payments.

Here's an example of how a CDS works:

An investor holds a bond issued by Company X and is concerned about the credit risk of the bond.

The investor buys a CDS from a seller, such as a bank, that agrees to make a payment to the investor if Company X defaults on its bond payments.

The investor pays a regular fee, called the "spread," to the seller in exchange for this protection.

If Company X defaults on its bond payments, the seller of the CDS will make a payment to the investor to compensate for the loss.

In another example:

An investor wants to invest in a bond issued by a company, but is concerned about the risk of default.

Instead of buying the bond, the investor buys a CDS from a seller, such as a bank, that agrees to make a payment to the investor if the company defaults on its bond payments.

The investor pays a regular fee, called the "spread," to the seller in exchange for this protection.

If the company defaults on its bond payments, the seller of the CDS will make a payment to the investor to compensate for the loss.

It's worth noting that CDS were at the center of the 2008 financial crisis, as they were used to insure large amounts of subprime mortgages, and were one of the key drivers of the crisis when the housing market collapsed. Since then, regulations have been put in place to increase transparency and reduce systemic risk in the CDS market.

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## What recent announcement in the news may affect the bank's activities?

Recent news that may affect the banking industry includes the Federal Reserve Board's announcement of its approval of Bank of Montreal and BMO Financial Corp. on January 17, 2023. Additionally, the Federal Reserve Board recently fined Popular Bank $2.3 million for processing six Paycheck Protection Program (PPP) loans despite detecting potential fraud. Furthermore, the Board of Governors of the Federal Reserve System met on January 23, 2023 to review and determine the advance and discount rates to be charged by the Federal Reserve Banks. To further enhance the banking system, the Board also released results of a survey of senior financial officers at banks about their strategies and practices for managing reserve balances. Finally, the Board recently designated the Chairs and Deputy Chairs of the 12 Federal Reserve Banks for 2023. These announcements are sure to have a significant impact on the banking industry in the coming year.

## What are the risks of waiting for the next year before raising the interest rates substantially in the US?

The risks of waiting for the next year before raising the interest rates substantially in the US include the potential for inflation to become entrenched, reducing the effectiveness of monetary policy in controlling it. There is also the risk that the US economy may have already passed its peak and will weaken in response to higher interest rates. Additionally, waiting too long to raise rates could lead to an overheating of the economy, creating further economic instability.

## You are using multiples to value a company but those multiples are skewed. How will you rectify?

There are several ways to rectify skewed multiples when valuing a company:

Use a different multiple: If the multiples you are using are skewed, you can try using a different multiple that is more appropriate for the company. For example, if the company has a high level of debt, you may use the enterprise value to EBITDA multiple instead of the price to earnings multiple.

Use a different set of comparable companies: The multiples you are using may be skewed because the comparable companies you are using are not truly comparable to the company you are valuing. In this case, you should try to find a different set of comparable companies that are more similar to the company you are valuing.

Adjust the comparable companies' financials: If the comparable companies' financials are not adjusted for one-time events or other non-recurring items, it could skew the multiples. Adjusting these financials to reflect a more accurate picture of the company's performance can help to reduce the skewness in the multiples.

Use a combination of multiples: Instead of relying on one multiple, you can use a combination of multiples to value a company. This can help to reduce the skewness of the multiples and provide a more accurate picture of the company's value.

Use a discounted cash flow (DCF) model: A DCF model will enable you to estimate the future cash flow of the company and discount them back to the present value. This method may be less susceptible to the skewness of the multiples, but it relies on the assumptions of future cash flow which can be uncertain.

It's important to note that no single method is perfect, and valuing a company is an art as much as a science. It's also important to consider the context and the company's specific characteristics, and to use a combination of methods to arrive at a more accurate valuation.

## Explain to me about Minority Interest and why do we add it in the Enterprise Value formula?

Minority interest is the portion of a subsidiary company that is owned by shareholders other than the parent company. In other words, it's the portion of a subsidiary's equity that is not owned by the parent company. When a parent company owns less than 100% of a subsidiary, the portion of the subsidiary's equity that is not owned by the parent company is known as minority interest.

When calculating the enterprise value (EV) of a company, minority interest is added to the EV formula because it represents a claim on the subsidiary's assets and earnings that is held by shareholders other than the parent company.

The EV formula is: EV = Market Capitalization + Debt + Preferred Stock + Minority Interest - Cash and Cash Equivalents

In this formula, market capitalization represents the value of the parent company, and debt, preferred stock, and minority interest represent the claims on the company's assets and earnings held by other parties. Cash and cash equivalents are subtracted from the EV formula because they represent cash that can be used to pay off debt and other liabilities.

By including minority interest in the EV formula, we are able to determine the total value of the company, including the value of the subsidiary's assets and earnings that are not owned by the parent company. This is important because it allows investors and analysts to have a more accurate picture of the company's overall value and financial position.

It's worth noting that minority interest is only relevant when a company has a subsidiary, in other cases, it is not applicable.

## Tell me why is cash subtracted from Enterprise Value (EV)?

Cash is subtracted from Enterprise Value (EV) because it represents an asset that is already on the company's balance sheet and is therefore already accounted for in the calculation of EV. Subtracting cash from EV allows for a more accurate representation of a company's true value, as it removes the value of cash that is already included in the calculation. Additionally, the cash can be used to pay off debt, invest in growth, or return to shareholders.

## Briefly walk me through a discounted cash flow analysis (including WACC and IRR)

A discounted cash flow (DCF) analysis is a method for valuing a company or investment that uses projected future cash flows, discounted to their present value. The main inputs for a DCF analysis are:

Projected cash flows: These are estimates of the company's future cash flows, typically for several years into the future.

Discount rate: This is the rate used to discount the future cash flows back to their present value. The discount rate is often referred to as the weighted average cost of capital (WACC) and it represents the average return that investors expect from an investment. WACC is the cost of capital taking into account the cost of debt and equity.

Terminal value: This is the value of the company or investment beyond the projection period, calculated using a method such as the Gordon growth model.

Once the cash flows, discount rate, and terminal value have been determined, the DCF analysis is performed by discounting each year's projected cash flow by the discount rate and adding up the present values of all the cash flows and terminal value.

The Internal Rate of Return (IRR) is the discount rate at which the net present value of future cash flows equals zero. IRR is often used as a measure of an investment's profitability. If the IRR is greater than the required rate of return, the investment is considered acceptable.

In summary, DCF analysis is a method of valuing a company or investment by projecting future cash flows, discounting them back to their present value using WACC, and adding them up to get an estimate of the value of the investment. IRR is used to measure the profitability of an investment by comparing the rate at which the investment will generate cash flows to the WACC.

## Suppose a company raises debt from a bank , what happens to its WACC?

When a company raises debt from a bank, it will generally increase the company's overall cost of capital, which would in turn increase the company's WACC. This is because debt financing typically has a lower cost of capital than equity financing. When a company takes on debt, it must pay interest on the debt, which increases the overall cost of capital.

The WACC is calculated by taking into account the weight of each source of capital (debt and equity) in the company's capital structure and the cost of each source of capital. As the company increases its debt, the weight of debt in the capital structure increases, and the cost of debt (interest rate) will be added to the WACC formula. This will increase the overall WACC.

It's worth noting that taking on debt can also have a positive effect on WACC, as it can increase the company's return on equity (ROE) and thus making the company more attractive to investors. A higher ROE can lower the required return on equity and decrease the WACC. But in general, if all else being equal, taking on debt will increase the WACC.

## A client who works in the aerospace industry wants to know about related markets which are impacting his stock price. Which industries and markets do you look at?

When analyzing the stock price of a company in the aerospace industry, it is important to look at several related industries and markets that can impact the stock price. Some of the industries and markets that may be relevant to consider include:

Defense: The aerospace industry is closely tied to the defense industry, as many aerospace companies provide defense-related products and services. Therefore, changes in defense spending and government contracts can have a significant impact on the stock price of aerospace companies.

Airlines and Commercial Aerospace: The demand for commercial aircraft and services from airlines can greatly impact the stock price of aerospace companies. Changes in the global economy, particularly in the travel and tourism sectors, can greatly affect the demand for commercial aircraft.

Space: The aerospace industry includes the space industry as well, changes in the space industry can greatly impact the stock price of aerospace companies that offer satellite manufacturing and launch services.

Raw Materials: The aerospace industry is heavily dependent on raw materials such as aluminum, titanium, and composites, changes in prices of these materials can greatly impact the stock price of aerospace companies.

Technology: The aerospace industry is a highly innovative sector, advancements in technology and new product development can greatly impact the stock price of aerospace companies.

Global Economy: The aerospace industry is a global business, changes in the global economy, particularly in key markets such as Asia and Europe, can greatly impact the stock price of aerospace companies.

Interest Rates: The aerospace industry is a capital-intensive business, changes in interest rates can greatly impact the stock price of aerospace companies by affecting the cost of capital.

It's worth noting that the stock prices of aerospace companies can also be affected by general market conditions such as changes in stock market indices, geopolitical events, and changes in investor sentiment.

## Tell me why can't I use EV/Earnings or Price/EBITDA as valuation metrics?

EV/Earnings and Price/EBITDA are commonly used valuation metrics, but they have certain limitations that may make them less appropriate in certain situations.

EV/Earnings:

EV/Earnings ratio is calculated by dividing a company's Enterprise Value by its Earnings. It measures the value that the market is placing on a company's earnings. However, Earnings can be affected by non-recurring items and accounting choices, which can make the ratio less reliable. Additionally, EV/Earnings can be affected by the level of debt and cash a company holds.

Price/EBITDA:

Price/EBITDA ratio is calculated by dividing a company's market capitalization by its EBITDA. It measures the value that the market is placing on a company's cash flow. However, EBITDA does not account for the cost of capital expenditures and working capital, which can make the ratio less reliable. Additionally, EBITDA can be affected by accounting choices and non-recurring items, which can make the ratio less reliable.

In general, it's worth noting that no single valuation metric is perfect, and it's always important to consider multiple metrics and perform a comprehensive analysis of a company's financials and overall business prospects. Additionally, it is important to compare the valuation metrics with the industry averages to get a better perspective on the company's relative value.

## Tell me a piece of news related to any kind of deal you have read or heard recently?

Recently, the news of the proposed deal by private equity firms KKR and Stone Point Capital to buy Centene Corp. for a whopping $2.2 billion has been making headlines. This proposed deal would mark a significant milestone in the M&A space. It is the latest in a series of large-scale M&A deals in the industry and could potentially be the largest healthcare M&A deal in the US this year.

## How do the three financial statements fit together?

The three main financial statements that companies use to report their financial performance and position are the balance sheet, income statement, and cash flow statement. These three statements are interrelated and provide a comprehensive picture of a company's financial health and performance.

The balance sheet: The balance sheet is a snapshot of a company's financial position at a specific point in time. It shows the company's assets, liabilities, and equity. The balance sheet equation is: assets = liabilities + equity. The balance sheet can provide information about a company's liquidity, solvency, and overall financial health.

The income statement: The income statement shows a company's financial performance over a specific period of time, such as a quarter or a year. It shows a company's revenues, expenses, and net income (or loss). The income statement can provide information about a company's profitability and growth.

The cash flow statement: The cash flow statement shows the inflow and outflow of cash for a specific period of time. It shows the cash generated from operations, investing and financing activities. The cash flow statement can provide information about a company's ability to generate cash and its future liquidity.

Together, the three statements provide a comprehensive picture of a company's financial performance and position. The balance sheet provides information about a company's assets, liabilities, and equity, the income statement provides information about a company's profitability and growth, and the cash flow statement provides information about a company's ability to generate cash and its future liquidity. These statements are used to evaluate the company's financial health and performance, and to make informed investment decisions.

## Tell me which is the best method to value a company and why?

There is no single "best" method to value a company, as the appropriate method will depend on the specific circumstances of the company and the information available. Different methods have their own strengths and weaknesses, and it's often useful to consider multiple methods and compare the results.

That being said, some commonly used methods for valuing a company include:

Discounted Cash Flow (DCF) analysis: This method involves estimating a company's future cash flows and discounting them back to their present value using a discount rate. DCF analysis is considered to be one of the most accurate and reliable methods of valuing a company, as it considers the company's future cash flows and growth potential.

Comparable Company Analysis (CCA) : This method involves comparing a company's financials and valuation metrics to those of similar companies in the same industry. It can be useful in cases where a company has limited historical financial data, but is considered less reliable than DCF analysis as it relies on market data which may not be accurate.

Precedent Transactions Analysis: This method involves analyzing past transactions of similar companies to determine a range of values that a company could be worth. This method is considered reliable when there is a sufficient number of precedent transactions.

Asset-based Valuation: This method involves valuing a company based on the value of its assets, such as real estate, plant, and equipment. This method is mainly used for tangible assets-heavy companies, and it can be considered less reliable when a company has a large proportion of intangible assets.

Dividend Discount Model (DDM): This method values a company based on the present value of its future dividends. This method can be considered less reliable as it relies on the company's ability to pay dividends, which may not be sustainable in the long term.

Ultimately, the best method to value a company will depend on the information available, the company's industry and the purpose of the valuation. It's important to use multiple methods and consider different scenarios to get a more accurate picture of a company's value.

## Why would you or would you not invest in penny stock?

Investing in penny stocks can be a risky endeavor for any investor. Due to the extremely low cost of these shares, even a small change in the stock's price can result in a significant change in value. This means that if an investor is not well-versed in the stock market, they could end up losing a significant amount of money. Additionally, penny stock companies often lack the resources and infrastructure of larger companies, resulting in an increased risk of fraud and market manipulation. Because of these risks, it is important for any investor interested in penny stocks to do their research and understand the underlying market before investing.

## How will Joe Biden's policies affect the stock market and M&A climate?

Joe Biden's policies are expected to have a positive effect on the stock market and M&A climate. The stock market has already surged since the election, with the S&P 500 seeing a 13% gain since November 2020, and 64% of corporates and 60% of private equity firms surveyed saying the Biden-Harris administration will have a positive impact on M&A. This is due in part to President Biden's Executive Order aimed at increasing competition in the American economy, with 72 initiatives designed to reduce the trend of corporate consolidation. This will help to reduce prices and increase wages, while promoting innovation and faster economic growth.

## Where are the 1-year, 5-year, and 10- year US Treasury yields?

The US Treasury yields for 1-year, 5-year, and 10-year maturities are currently at 0.10%, 0.90%, and 3.46% respectively . This data is derived from input market prices and is indicative of the current Treasury market conditions . The 10-year Treasury Rate is significantly lower than the long-term average of 4.26%.

## Would you invest in real estate now and why?

The real estate market is a complex and ever-changing environment. The decision to invest in real estate should be based on several factors, including the current economic climate, local market conditions, and expected future trends.

It's important to consider the current state of the economy and the potential for it to improve or worsen. Additionally, the local real estate market should be researched to determine the current supply and demand, average home prices, and typical rental rates. Knowing these factors can help investors decide if now is the right time to invest in real estate.

Other factors to consider include expected future trends, such as population growth, job opportunities, and industry changes. Researching the local area and speaking to experts in the industry can help investors decide whether or not to invest in real estate now. With careful consideration and research, investors can make an informed decision about investing in real estate now.

## What do you think is going to happen with interest rates over the next six to twelve months?

Mortgage rates are expected to remain elevated in the short-term as the Federal Reserve continues to raise its benchmark interest rate. However, many experts predict that rates will level off in the coming months as the Fed begins to scale back its rate hikes. The Fed signaled plans to continue raising the federal funds rate into 2023, though likely at smaller increases. Bankrate sees the US central bank lifting rates to 5.25-5.5 percent, a quarter-point higher than the Fed's current forecasts. Mortgage rate volatility is one of the main drivers of the increase in mortgage rate spread. With inflation cooling and the economy heading into a possible recession, it is possible that we have already seen the peak of this rate cycle. It is likely that mortgage rates will moderate in the coming months, but they could still go up or down.

## What has the market been doing? Why? What do you think it will do in the coming 12 months? Explain your view?

The stock market has been on a rollercoaster ride lately. It has seen a sharp rise in the past few months due to the economic recovery from the pandemic-induced recession. Investors have been optimistic about the economic recovery and the accommodative monetary policies adopted by governments and central banks.

In the coming 12 months, I believe the market will continue to rise, albeit at a slower rate, due to the strengthening of the economic recovery. Businesses are now more confident about the future and are investing heavily in the stock market. The central banks are expected to maintain their accommodative stance in the near future, which will help support the market. Investors should also consider the risk of volatility, as the market is prone to sudden changes.

Overall, the market is in a good position to continue its growth in the long-term. The key will be to exercise caution when investing and to diversify investments across asset classes. Furthermore, investors should take advantage of the current low interest rates and look for opportunities to earn a favourable return on their investments.