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Investment Banking interview questions for Testers

Banking Investment / May 27, 2020

by The Interview

Within the next few weeks, investment banks will start inviting their favourite applicants in for interviews. Full time analysts are typically interviewed first, with summer analysts usually interviewed from November onwards. If you’re going for a front office job, expect a grilling. Banks will be testing a combination of your industry knowledge, passion for the industry and motivations for wanting to join them.

It’s not just technical questions you need to bone up on. In fact, some of the hardest questions can be those testing your motivations, so be prepared.

So, what are the toughest interview questions banks like to ask graduate hires? We’ve listed them below, along with some ‘ideal’ responses from experts – Peter Harrison, a former Goldman Sachs banker who now runs Harrison Careers and Marc Hatz, a former M&A associate at both Goldman Sachs and Perella Weinberg Partners, who now helps students get into investment banking and Roy Cohen, a career coach and author of The Wall Street Professional’s Survival Guide.

1. Do you know how to perform a LBO analysis?

Marc Hatz’s suggestions:

“This is the short answer.

“Equity returns (IRR or cash on cash multiples) are calculated based on the investor’s entry and exit equity values. So to calculate an LBO return, you want to find out the investor’s projected equity value at exit: the investor entry equity value you already know (it is the equity amount the investor is injecting to acquire the company).

Now, equity value at exit (we will assume exit happens in year 5) simply is the company’s selling price (say, 10x LTM EBITDA), minus net debt. In our example, 10x is the price at which the company is sold. EBITDA in year 5 comes from the company’s income statement projections (management / investor projections). Net debt in year 5 is debt in year 5 minus cash in year 5. Debt in year 5 is debt at entry plus debt increases (typically 0) minus debt repayments over the investment period, as reflected in your debt schedule (assuming an amortizing tranche, the debt balance gradually reduces along the years as cash flow covers principal repayments). The company’s cash balance at exit is based on initial cash balance plus cash flows generated over the term of the investment (the bottom line in your CFS every year).

And the IRR formula is (investor’s exit equity value / investor’s entry equity value)^(1/n)-1. The cash on cash formula is (investor’s exit equity value / investor’s entry equity value).”

2. Why sales? Why trading? Why research? Why asset management? Why private wealth management?

Peter Harrison’s suggestions:

“This is less of a question-and-answer and more about advice that will set you apart from other candidates in a very meaningful way. Most candidates know the correct way to answer the above questions (you list 3-5 reasons why you love this area and why you think you would be good at it. Ideally within 90 seconds.)

However, you will set yourself apart if you can produce something written, in the form of a mini-report. For Sales, this will be a 10-page business plan about how you plan to build your sales franchise. Same for PWM. For trading, it will be three trading ideas. For research, you can synthesise a research report you find online and use it to write you own research report (give the other report credit as a source).

For asset management, it will be an asset allocation, sector allocation (mentioning why you weight three sectors more and three sectors less), geographic allocation, and say, 4 shares or bonds you would invest in now. The report should look cosmetically sexy. The interviewer knows your plan/report has little value so appearance here counts for more than content. Let’s hire the candidate who went to all this trouble (5 hours??) to prepare properly for interview! Too far-fetched, I hear you think? No. We have used this exact technique for many years to ensure our candidates look better than others at interview. It works.

3. Tell me the ‘Greeks’ and why they matter

“Most candidates can regurgitate delta, gamma, theta, etc, but fewer can explain in layman’s terms why they are so important. Part of a good answer is explaining what gamma would be: ‘We know delta is important because we have to get our hedge right. But we also care a lot about gamma because we need to know how fast delta is changing. If gamma is high, I will worry and know I need to frequently readjust my hedge.” This candidate shows me he really gets option hedging in a practical way. He can also explain it accurately and succinctly.

4. Do you have any questions?

This can be tricky. To say nothing is to create awkward silences, but you don’t want to make inappropriate references to compensation or anything a Google search will have revealed, says Hatz.

“My first question has to do with the boutique model. I am trying to understand why boutique investment banks are more successful than bulge bracket banks in recession times. Is it simply because when you are a Morgan Stanley and weigh 30% of the market, whenever the market goes down, you would go down with it, whereas boutiques with a 2% market share cannot feel the hit? Or is there something else?”

“Another question if I may: a lot of boutique investment banks get into asset management on the side of financial advisory to compensate for the unpredictability of large deals. Is it a strategy that could interest you in the future, opening an asset management arm?”