Investment Banking industry mainly deals with creating capital and reducing the financial risk for other organizations. It is also considered as one of the most highly competitive yet lucrative field in the world of finance. The selection criteria followed by many renowned firms like JPMorgan Chase & Co., Goldman Sachs Group, Inc., Morgan Stanley is usually challenging for several investment banking professionals.
The top investment banks interview and selection process will have too many rounds. To perform well in these interviews an individual must be well-prepared. Getting an idea of the potential investment banking interview questions and answers will be highly useful to prepare better for the interview.
In this article, let’s discuss about some popular and most asked questions, answers and few tips that will be useful for an individual’s investment banking interview preparations. The questions and answers that are covered in these topics are mainly related to:
- · Accounting
- · Valuation
- · Capital Markets
- · Mergers & Acquisitions
- · Leveraged Buyout
Accounting
The popular term “accounting is the language of business” holds too many facts that are tough to ignore. An understanding of accounting concepts is a essential when it comes to three financial statements to ensure a long-term career irrespective of role in the investment banking industry.
The most widely asked accounting investment banking interview questions and answers will help you to ace your upcoming interviews.
| Read More: Investment Banking Certification Courses
Q) What are the three financial statements?
A)
Income Statement (“IS”): Income Statement offers organization’s profitability over a certain period, typically quarterly and annually. The starting line item is revenue and upon deducting various costs and expenses, the ending line item is net income.
Balance Sheet (“BS”): Balance Sheet is a snapshot of a organization’s resources (assets) and sources of funding (liabilities and shareholders’ equity) at a certain point in time, such as the end of a quarter or fiscal year.
Cash Flow Statement (“CFS”): In the indirect approach, Cash Flow Statement provides insights related to the cash inflows and outflows of an organization over a specific period. It is helpful to assess an organization’s ability to generate cash, manage its operating tasks, and meet its financial obligations.
Valuation
One of the highly asked questions is about the thorough understanding of Valuation. This concept plays a crucial role in investment banking interview preparations.
Q) When to use a Liquidation Valuation?
A)
Liquidation Valuation is used typically in bankruptcy scenarios to understand whether equity shareholders will get any capital after the enterprise’s debts are paid. It is usually implemented to advise grafting businesses on whether it’s better to sell their assets separately or to try and sell the entire enterprise.
Capital Markets
Capital markets are where savings and investments are channeled between suppliers and those in requirement of it. Suppliers are people or institutions with capital to lend or invest like banks and investors. Those who look for capital in this market are businesses, governments, and individuals.
Q) Are the Capital Markets the Same as Financial Markets?
A) The words “Capital Markets” and “Financial markets” are very closely connected. Capital markets are a subset of financial markets. They refer to the marketplaces where long-term debt and equity securities are purchased and sold. Whereas, financial markets refer to the larger marketplaces where several different financial instruments get traded. They offer a trading platform for both buyers and sellers, assisting the flow of capital and enabling the transfer of risk.
Mergers & Acquisitions
The investment banking professionals who aspire to join this industry are required to have more knowledge of technical questions as well. Hence, it is crucial to understand the main concepts related to Mergers and acquisitions.
Q) What are the differences among vertical, horizontal, and conglomerate mergers?
A) Vertical Merger: A vertical merger includes two or more firms that serve various value chain functions in the same industry of the production process.
Horizontal Merger: A horizontal merger includes a merger amongst firms directly competing in the same or sometimes very similar market. Hence, competition in the market is minimal for the horizontal merger.
Conglomerate: A conglomerate is the collaboration of multiple business entities operating in various individual industries for diversification purposes.
Leveraged Buyout
In a leveraged buyout, a private equity company (often called the financial sponsor) obtains an enterprise with most of the purchase price getting funded via the usage of several different debt instruments like loans, and bonds. The financial sponsor will secure the financing package in advance of closing the transaction and then contribute the remaining amount.
Q Mention a real-time example of a LBO.
A)
The real-time example of an LBO is choosing a mortgage when a person buys a house. Here’s how the analogy works:
● Down Payment: Investor Equity in an LBO
● Mortgage: Debt in an LBO
● Mortgage Interest Payments: Debt Interest in an LBO
● Mortgage Repayments: Debt Principal Repayments in an LBO
● Selling the House: Selling the Company/Making it Public in an LBO
Wrapping Up
The investment banking interview preparations can be a challenging but rewarding process. But it is important to remember that practicing is the key, which will build your confidence. Consistently try for you dream job with your problem-solving skills, thought process, ability to communicate effectively.
