17 Investment Banking Analyst Interview Questions

1. What is Investment Banking?

Investment Banking is a division of banking which works towards generating capital for other businesses, that may be private, public or government.

The investment banks operate by underwriting the debt and equity securities on behalf of their client, facilitating mergers and acquisitions, providing guidance on issue and placement of stock etc.

Many banks operate both in retail and investment segments. But, to be fair to the market, both the businesses are required to be absolutely dissociated.

Video : Investment Banking Analyst Interview Questions and Answers - For Freshers and Experienced Candidates

2. What do you know about the major services offered by Investment Banks?

Well, Investment Banking is a gamut of a lot of activities & this question check your awareness of them. The major services offered by Investment banks are:

i.) Mergers and Acquisition Advisory (M & A Advisory) - Investment banks possess an expert knowledge about the market conditions and the status of the business that their client wishes to take over or merge with. They provide their client an expert guidance to maximize their profit and minimize the risk so that it can meet it growth aspirations.

ii.) Managing Capital Issues - This includes IPO, FPO, Preferential issues, Debt Placement etc. The idea is to help the client meet its objectives and in turn make money.

iii.) Debt Syndication - If the client doesn't have sufficient funds to finance a big project, the investment banks helps them with term loan, working capital loan, mezzanine finance etc. thus allowing the client to take up the right project at a right time.

iv.) Buyback advisory - They also advise their clients the right time and price at which they should buy back their shares.

v.) Corporate Advisory - To the big clients, based on their needs. This includes developing a business plan, project advisory, project identification, corporate restructuring etc.

So, these are some of the major services offered by Investment banks.

3. What are the major responsibilities of an Investment Bank Analyst?

Investment Banking Analysts are just out of college, junior level people at an Investment Bank, and the bottom line of whole investment banking deal is to raise money for your client.

The purpose of asking this question is to check, if you are aware of what you are required to do in this role and more importantly, are you ready to shoulder those responsibilities.

The major responsibilities of the person taking up this role are:

i.) Research and Analysis - Of client's portfolio.

ii.) Creating financial models

iii.) Monitoring the finances and carrying out company valuations

iv.) Pitch book compilation

v.) Producing reports - to be presented to your own management and the client.

4. What are the three most important financial documents of a company?

The three most important financial documents of a company are:

i) Balance Sheet - A distribution of assets and liabilities, this document shows the financial status of a company at a given point of time.

ii) Income statement - Shows the profitability of a company from accounting perspective.

iii) Cash flow statement - Shows the cash flow for a business from various sources.

5. How would you value a company?

There are 3 primary ways to value a company:

i.) DCF Method - This is an intrinsic valuation methodology. It stands for Discounted Cash Flow and here you discount the values of future cash flows back to present.

ii.) Multiples approach - This is a relative valuation methodology. Here you multiply a company's earnings with the P/E Ratio of the industry in which it wants to compete.

iii.) Transactions approach - In this approach, you compare the company with other companies in the same domain that have been sold or acquired.

6. Which of the following is higher - Cost of debt or Cost of equity?

The cost of equity is higher. The cost attached to borrowing debt is tax deductible.

Another reason for this is that the equity investors are not guaranteed fixed payments and they are the last ones to be paid during liquidation.

7. What do you know about the CAPM Model?

CAPM stands for Capital Asset Pricing Model. It is used for calculating the Cost of Equity. As per this model, the expected return of a security is linked to the overall market basket.

Cost of Equity = rf + ß *(rm – rf).

Market risk premium = rm – rf
rm = Market rate of return
rf = Risk free rate

Rate of return = Returns generated by the market where company's stocks trade.

Risk free rate = Rate of return of an investment with zero risks associated to it. It is a hypothetical rate because it is difficult to achieve in real life.

Risk free rate of return has three components associated with it - Inflation, Rental rate and Maturity/ Investment Risk.

ß = Risk level of individual security with respect to wider market.

Higher is the values of ß, more volatile is the stock. Lower is the value of ß, more stable is the stock.  

8. In which cases should a company issue equity rather than use debt to fund its operations?

A company should consider issuing equity over debt to fund its operations in following cases:

i.) If the owners wish to sell off a part of their ownership

ii.) If the company wants to pay off its debt or adjust cap structure

iii.) If the projects are not expected to generate immediate or continuous cash flow to pay off the debt

iv.) If the company believes that its stock price is inflated. This will help them generate large capital