40 Investment Banking Interview Questions & Answers

Investment Banking is a popular field within the finance industry, offering numerous opportunities for motivated professionals. To ace an investment banking interview, you need to be well-prepared and well-versed in the basics of finance and investment. Here are the top 40 investment banking interview questions along with their potential answers.

Basic and Personal Questions

1. What is investment banking? Investment banking is a specialized banking sector that helps individuals, corporations, and governments in raising capital by underwriting and/or acting as an agent in the issuance of securities. Investment banks also assist in M&A activities, provide ancillary services like market making and equity research.
2. Why are you interested in investment banking? I’m interested in investment banking due to its dynamic nature and the intellectual challenge it provides. I enjoy financial modeling, valuation, and working with numbers. Also, investment banking provides an opportunity to work on significant transactions that shape the business landscape.
3. What are your long-term career goals? In the long-term, I aim to be an expert in the field of investment banking, and take up leadership roles where I can strategize and influence business decisions. I am also interested in specific sectors like technology or healthcare and would like to specialize in those.
4. What attracts you to our bank? What attracts me to your bank is its reputation for excellence, the opportunity for growth, and the caliber of colleagues I’d be working with. Also, I appreciate your bank’s commitment to innovation and its client-centric approach.
5. How do you handle stress and pressure? I handle stress and pressure by maintaining a well-organized work plan and keeping a calm demeanor. I focus on the task at hand and try to manage my time effectively. Regular exercise and proper rest also help me stay balanced under pressure.
6. Tell us about a recent news article you read, which could impact our business. I recently read an article about the ongoing shifts in global trade policies, which could impact cross-border M&A transactions. It might lead to greater scrutiny of deals and potentially higher costs or longer timelines.
7. What are the most significant risks that banks are facing today? Some of the most significant risks that banks are facing today include cyber-security threats, disruptions from financial technology advancements, regulatory changes, low-interest-rate environment, and risks associated with global geopolitical uncertainties.
8. Describe a situation where you demonstrated initiative. In my previous role, I noticed that the process of compiling financial reports was time-consuming and prone to error. I took the initiative to develop an automated tool using Excel macros, which significantly reduced errors and improved efficiency.
9. Can you discuss a financial deal that interested you recently? The recent acquisition of Company X by Company Y piqued my interest. The deal was significant due to the size of the companies involved and the potential for industry disruption. I was particularly interested in the valuation and how the deal was financed.
10. How would you pitch our firm to a potential client? I would highlight our firm’s expertise, track record, and deep industry knowledge. I would discuss past successful deals similar to the client’s situation and emphasize our commitment to providing personalized services. I’d also mention our global network and ability to bring in resources from various areas to meet the client’s needs.

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Technical Questions

1. Can you explain discounted cash flow (DCF) analysis? Discounted Cash Flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses future free cash flow projections and discounts them to the present value, which is then used to evaluate the potential for investment.
2. How would you value a company? There are several ways to value a company including the DCF analysis, Comparable Companies analysis, and Precedent Transactions. The best method to use depends on the nature of the business, the industry in which it operates, and its stage of development.
3. What is the capital asset pricing model (CAPM)? The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between systematic risk and expected return for assets, particularly stocks. It is used in the calculation of an investment’s expected return.
4. What is the difference between enterprise value and equity value? Enterprise value is the total value of a business including equity, debt, and other financial obligations minus cash and cash equivalents. Equity value, on the other hand, is the value of a company’s shares of stock and retained earnings. Essentially, Enterprise value reflects the entire value of a business, while equity value only represents the shareholder’s interest.
5. Can you explain the Modigliani-Miller theorem? The Modigliani-Miller theorem is a cornerstone of finance theory, stating that in an ideal world (without taxes, bankruptcy costs, etc.) the value of a firm is unaffected by its capital structure. The theorem implies that the mix of debt and equity a firm uses to finance its operations is irrelevant to its overall value.
6. What is working capital and why is it important? Working capital is a measure of a company’s operational liquidity. It is calculated as current assets minus current liabilities. It’s important because it indicates a company’s ability to cover short-term obligations and fund day-to-day operations.
7. What are the main elements in a company’s annual report? The main elements in a company’s annual report include the income statement, balance sheet, cash flow statement, statement of changes in equity, notes to the financial statements, and management’s discussion and analysis. It might also contain a letter from the CEO and auditors’ report.
8. Can you explain the concept of financial leverage? Financial leverage refers to the use of debt to acquire additional assets. When used effectively, it can increase the potential return on investment. However, it also increases the risk of loss, since debt comes with the obligation of repayment regardless of business performance.
9. What is a yield curve and why is it important? A yield curve is a graphical representation of the interest rates on debt for a range of maturities. It shows the relationship between the interest rate (or cost of borrowing) and the time to maturity of the debt. It’s important as it can give indications of future interest rate changes and economic activity.
10. How would a $10 million asset write-down impact the income statement, balance sheet, and cash flow statement? On the income statement, the asset write-down would increase expenses, thereby reducing net income. On the balance sheet, assets would decrease by $10 million, which could reduce equity if the write-down goes through retained earnings. There is no immediate cash impact, so the cash flow statement wouldn’t change from this transaction. The write-down might appear as a non-cash adjustment in the operating activities section in the subsequent period.

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Scenario-Based Questions

1. How would you advise a client who wishes to buy a competitor? I would start by conducting a thorough analysis of the target company, assessing its financial health, market position, growth prospects, and potential synergies with our client’s business. I’d also review potential risks, including cultural integration and potential antitrust issues. If the analysis is positive, we’d work on a negotiation strategy and financing the deal.
2. If a company’s competitor has superior financial ratios, where would you look to find potential problems? Superior financial ratios don’t necessarily imply a flawless company. One might need to look at the quality of earnings, dependency on a few customers, regulatory risks, outdated technology, over-reliance on debt, quality of management, and future industry prospects. An in-depth analysis of the financials and business model is essential.
3. How would you approach the valuation of a startup with no revenue history? In such cases, traditional valuation methods based on financial metrics may not be applicable. Alternative methods such as the discounted cash flow analysis based on projected revenues, comparisons with similar startups (valuation multiples), or the venture capital method can be used.
4. If you had $1 million to invest, what would you do with it? The investment strategy would depend on various factors such as risk tolerance, investment horizon, financial goals, and market conditions. It could include a diversified portfolio of equities, bonds, real estate, and alternative investments.
5. Can you walk me through a hypothetical LBO model? A Leveraged Buyout (LBO) model involves a company being acquired using a significant amount of borrowed money. The key steps involve setting up assumptions, creating a sources and uses table to understand where the purchase price is coming from and where it’s going, projecting the company’s future cash flows, determining the debt repayment schedule, and calculating the potential return on investment.
6. How would you analyze the credit risk of a potential borrower? I would evaluate the borrower’s credit history, financial health, cash flow forecasts, the industry they operate in, and any collateral offered. I’d also consider macroeconomic conditions that could affect the borrower’s ability to repay the loan.
7. How would you advise a client considering a major capital expenditure? I’d advise the client to conduct a thorough cost-benefit analysis and assess the potential ROI. It’s also important to consider the impact on cash flows and debt levels, as well as alternative uses of capital.
8. Imagine a company is looking to IPO. What factors should they consider? A company should consider market conditions, its financial health and growth prospects, the potential benefits and drawbacks of becoming a public company, the costs associated with an IPO, and its readiness to comply with regulatory requirements.
9. How would an increase in interest rates impact a company? An increase in interest rates increases the cost of borrowing, which could lower profitability for companies with significant debt. It also makes new investment projects less attractive. On the other hand, if a company has substantial cash reserves, it could benefit from higher interest income.
10. Imagine you’re working with a client who wants to sell their business. How would you help them maximize their sale price? I’d advise the client to focus on increasing profitability, improving financial reporting, and reducing risks that might concern a potential buyer. We’d also work on presenting a compelling narrative about the company’s growth prospects. Finally, we’d target a broad range of potential buyers to ensure competitive tension.

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Behavioral and Competency Questions

1. Describe a situation where you had to work under pressure. During a previous role, we were working on a deal that had a strict deadline. Several unexpected issues came up that required quick resolutions. I prioritized the tasks, delegated where possible, and focused on resolving them one at a time while ensuring all necessary work was completed on schedule. It was challenging but helped me improve my problem-solving and stress-management skills.
2. Tell me about a time when you had to resolve a conflict within your team. In a past role, two team members had a disagreement over how to approach a project. I organized a meeting where everyone could express their views openly. I encouraged constructive discussion and ultimately helped the team reach a compromise that satisfied both parties and benefited the project.
3. Give an example of a goal you didn’t meet and how you handled it. Once, I led a project that didn’t meet our initial sales targets. I organized a meeting to review our strategy and realized our target audience was not as we initially perceived. We adjusted our approach and learned a valuable lesson about the importance of ongoing market research.
4. How do you approach making important decisions? When making important decisions, I gather as much information as possible and weigh the potential pros and cons of each option. I seek input from others when appropriate, but I’m also comfortable making tough calls when necessary.
5. How do you manage your time and prioritize tasks? I start by listing all tasks, estimating the time required for each, and identifying deadlines. I prioritize based on the importance and urgency of tasks. I also leave some buffer time for unexpected tasks and adjust my plan as necessary.
6. Describe a situation where you went above and beyond for a client. A client needed a detailed report on a tight deadline. I worked late into the night to ensure the report was completed on time. The client was grateful for my dedication, which strengthened our business relationship.
7. How do you handle failure? I see failure as an opportunity to learn. If something doesn’t go as planned, I analyze what went wrong, determine what could be done differently, and apply these lessons to future situations.
8. Can you describe a situation in which you had to use your excellent negotiation skills? In a past role, I had to negotiate the terms of a deal with a challenging client. I focused on understanding their concerns, presented clear arguments supporting our position, and worked towards a mutually beneficial agreement.
9. Describe a time when you had to persuade a colleague or manager to accept your idea. I proposed a new approach to streamline our financial reporting process. Initially, my manager was resistant to change, but I presented evidence showing how my idea could save time and reduce errors. Eventually, my manager agreed to a trial run, which was successful.
10. How do you handle criticism? I view criticism as a tool for personal and professional growth. I listen carefully, ask for clarification if needed, and use the feedback to improve. If I disagree with the criticism, I express my point of view respectfully.

Remember, while knowledge of financial concepts and technical skills are essential in an investment banking interview, your drive, ambition, and people skills will also be evaluated. Be honest, concise, and confident in your responses, and be ready to ask intelligent questions about the role and the firm. Good luck!