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Top 11 Investment Banking Interview Questions and Answers

You have to pass through a challenging interview process to be hired as an investment banker in a cooperative, commercial, or government bank.

Jobs in investment banking are numerous, but it is still a highly competitive place. Therefore, to stand out from the rest of your peers, you have to impress your hiring manager with your knowledge and skills.

The top 10 investment banking interview questions that are frequently asked in an investment banking interview are compiled below.

The interviews these days don’t ask the typical questions that include the fundamentals of financial concepts that interviewers want candidates to think about and avoid theories that everyone normally knows and since these questions are technical there will always be a correct answer in case If you don’t know a specific answer, don’t try to forge one.

It’s always better to admit that you don’t know. However, before we move into the investment banking interview questions, let us first understand some of the basics as interviewees often fumble upon them.

Investment Banking Interview Questions and Answers for Freshers

1. Who is an investment banker?

This might be a fundamental question, but you will be pretty surprised to find that this is one of the most common investment banking interview questions that a hiring manager asks and yet fails to receive a satisfactory answer.

Therefore, to help you ace the interview, a summarization can surely help impress your interviewer.

Investment bankers are financial advisors for governments, companies, or other entities, who help them raise finances for expansion and growth. For example, a company usually hires them to manage its initial public offering (IPO).

An investment banker is involved in numerous financial activities, but some of the most important roles played by the investment banker are

  • arranging finances
  • equity financing, i.e., arranging the sale of the stocks
  • underwriting deals for clients
  • negotiating with acquisitions and mergers
  • arranging private placements on bonds and stocks

Now that we have summarized the roles of an investment banker let us now look at the most frequently asked investment banking interview questions

2. What are the essential qualities that an investment banker should have?

To answer one of the most common investment banking questions, here is the list of some essential qualities

  • Ability to learn quickly and have a unique thought process
  • Having strong analytical skills
  • Excellent communication skills
  • Strong work ethic
  • Having a positive and determined mindset
  • Having the ability to finish work within the deadline i.e. having excellent time management skills
  • Having a knack to pay attention to details

3. What are the basic differences between investment and commercial banking?

Some of the basic differences that help in differentiating the different types of banking are

Investment banking
Acts as an intermediate between investors and companies
Does not accept deposits, sells investments, loans, debts/equity, advises on M&A

Commercial banking
Accepts deposits from customers and generates commercial loans with that money
Loans made by commercial banks are held as assets on the bank balance sheet

4. How can a company be valued?

There are generally two methodologies that help in valuing a company which are :

  • The intrinsic value which is the discounted cash flow valuation
  • A relative valuation which is the comparable/multiples valuation

Intrinsic Method (DCF method)
Academically respected approach this method states that the value of productive assets is equal to the present value of its cash flow

Relative Valuation Method
Forms a comparable peer group structure where it analyses different companies in the same industry which have the same growth, operations, risk, and returns on capital characteristics

There is another method of evaluation, too, which is called the transactions approach method.

5.Describe in brief about financial statements

Interviewees, take note cause this is one of the most common investment banking interview questions.

Financial statements help a company to understand the different elements of their business. As a result, these play a very crucial role in investment banking.

There are three types of financial statements, which are:-

  • income statement (covers a specific period and helps in displaying the profitability of a company)
  • balance sheet (helps in showcasing the assets of a company as well as the liabilities and the stockholders’ equity)
  • statement of cash flows (helps in illustrating the cash account for a period)

6. How can one make a good financial model?

A good financial model identifies all the essential components of a business. In addition, the model should be able to gauge the dynamic scenarios of error checking and built-in analysis. Making the perfect finance model requires patience, and it has to be precise and accurate.

7. How can one differentiate enterprise value from equity value?

Enterprise value: Also known as the takeover value, enterprise value is the value of operations that the company attributes to all the capital providers. It helps in creating valuation ratios/metrics.

Equity value: A component of enterprise value, equity value represents the proportion of value attributed to shareholders.

8. Which is said to be typically higher- the cost of debt or the cost of equity?

The costs associated with borrowing are tax-deductible, which means that the cost of equity is higher than debt. Also, it needs to be addressed that, unlike lenders, equity investors are not guaranteed investors and always last in the liquidation list.

9. How can the cost of equity be calculated?

Another frequently asked investment banking interview question, one needs to summarize the following points to answer this question.

The Capital Asset Pricing Model (CAPM) is predominantly used to calculate the cost of equity.

The formula used for calculation is
Cost of equity(re) = ß× Market risk premium (rm-rf) + Risk-free rate (rf)

Risk-free rate: theoretically reflects the yields of maturity of default-free government bonds that are of equivalent maturity to the time of each cash flow being discounted.

Market risk premium: helps in showcasing the returns of investing in stocks that are over the risk-free rate.

Beta (ß): helps in estimating the degree of an assets systematic i.e., the non-diversifiable risk

10. When should a company issue equity instead of debt to fund the operations?

In the following situations, the company generally issues equity with funding operations when the owner wants to sell off a part of the ownership, when the company feels that the stock price has inflated, when a company decides to invest in new projects which will not provide immediate or consistent cash flow in situations where companies want to adjust the capital structure or pay their debts.

11. What are the possibilities for two companies to merge?

Two or in fact, more companies can merge when the following situations arise

  • Gaining competitive advantage over larger market share
  • Increasing capabilities and diversifying services and products
  • The combined entity will cause a significant reduction in costs

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