London Business School Finance Club

Sample Interview Questions Summer 2007 Recruitment

London Business School Finance Club

Interview Question Book

Disclaimer

DISCLAIMER
The views expressed in this document do not reflect the views held by London Business School, or the London Business School Finance Club. They are personal views held by individuals, and cannot be considered as true representations of the specified companies. No authourisation or permission, from any current employees of the companies represented in this document, was obtained in producing this document. Nor was any correspondence in any form, from any current employees of the companies represented in this document, engaged in whatsoever during the collection of information contained in this document. This document is a representation only of information collected from various sources, as listed in the references section of this document, and personal views of individual students that worked at the relevant company over a summer internship. Those personal views are an individuals own view, and is not in any way a representation of true nature of the relevant company , nor reflective of the actual culture at that company.

London Business School Finance Club

Interview Question Book

Contents

Table of Contents:
COMPETENCY: MARKET KNOWLEDGE IBD & SALES/TRADING: IBD: SALES/TRADING: DERIVATIVE QUESTIONS: COMPETENCY: AWARENESS FINANCE INDUSTRY IBD & SALES/TRADING: IBD: SALES/TRADING: COMPETENCY: COMMERCIAL ORIENTATION IBD: SALES/TRADING: BRAINTEASERS: RECOMMEND RESOURCES: SAMPLE QUESTIONS: FIT: 1 1 2 3 3 5 5 5 5 6 6 8 9 9 9 10

London Business School Finance Club

Interview Question Book

Competency: Market Knowledge

Competency: Market Knowledge

IBD & Sales/Trading:
What are current issues in the global interest rate environment? Discuss something of interest to you about the European financial markets. Why did you choose this example? Do you think the current (equity, bond, housing) markets are fairly valued? The European markets currently trade roughly at a PE of 15 and the US market at a PE of 20. Do you think the European markets are undervalued? Is PE a good indicator of value? Why? What types of structural/industry difference could be the cause of the different valuations? Talk about the difference in equity valuation between the US and European markets. Where are they today and why, and where do you think they are they going in the future. What is happening with the Fed? With the curve? Do you agree with the Fed assessment, actions? If you were Ben Bernanke, what would you do at the next FOMC meeting? What implications do increases in interest rate have on the equity market, corporate debt market? What does it tell you about where in the cycle economies are right now? What would be your investment strategies in the rising interest rate environment? Do you have any investment ideas? (make sure that when the candidate discusses this, he specifies the investment horizon and risk parameters) What is your forecast for the US/EU economy over the next year? What market are you following? What drives the movements of that market? How would you make money in X country? Where would you invest (industry, etc.)

London Business School Finance Club

Interview Question Book

Competency: Market Knowledge

IBD:
What drives the large flow of current M&A, LBO activities? What could lead to a slowdown in the M&A market? When will LBO cycle end? How do banks make money in LBOs; how do private equity houses make money in LBOs; who will generate higher returns from these transactions banks or private equity, why? What characteristics make a company a good M&A, LBO target? Give me an example from FTSE100, FTSE250 of a potential target? Run me through a deal you have been following (Why did it occur, who are the participants, explain the valuation metric, do you agree with the value, why/why not? Who does the deal benefit, who does it hurt? What are its larger implications to equity/bond/M&A markets? Should and could Vodafone be LBOd?

London Business School Finance Club

Interview Question Book

Competency: Market Knowledge

Sales/Trading:
Draw the yield curve as it is today. What did it look like one year ago? Why is the yield curve flat? What does it mean? What challenges lie ahead for the Fed Chairman? What is the best predictor of future exchange rates? What has happened in the vol markets in the US lately? Where do you think rates are going? (US/UK/EURO) What is the spread of the official interest rates between US and Europe? What explains the weakness of the US Dollar? Who does a weaker dollar benefit, hurt? What's going on in the credit markets these days? What has been happening to the credit spreads in the past 2 years? What trend should we expect in the next 12 months? Are you a buyer or seller of credit risk? Why? What is the credit rating for GM and Ford? What were the causes of the downgrades? Investment bankers think that the Jaguar division of Ford is worthless what do they mean? What would be your investment strategy for GM and Ford? What is the spot price of oil? What is the spot price of gold? What is the 2-, 5-, 10 year US treasury yield? Which part of the curve would you buy? Where would you invest a portfolio of 1m? What are the risks associated with this portfolio? How can you mitigate country risk? How can you mitigate fx risk?

What trades do you have on now in your personal account? Pitch me a stock.

Derivative Questions:
What is a Var swap? Why are they used? How would you hedge a Var swap? Which contracts would you use? Why? What is more valuable: Short-date or long-date gamma? How do you hedge a full delta call, put, combo? European Call, No Dividend, ATM, 1YR, RF=6%, is delta <.50< ?

London Business School Finance Club

Interview Question Book

Competency: Market Knowledge

If you buy a put, are you buying or selling volatility? Draw an ordinary call option payoff curve Draw the curve of Delta Where is Delta maximized? Where is Gamma maximized? Draw the gamma curve as a function of price. What happens to the curve as the expiry date becomes closer? If you want to maximise gamma do you by long or short dated? Do you buy long or short dated to maximise Delta?

London Business School Finance Club

Interview Question Book

Competency: Industry Awareness

Competency: Awareness Finance Industry

IBD & Sales/Trading:
What area of the bank would you like to work for? Why? What will you be doing as an associate? Who do you think are our main competitors and do you think makes us different from them? Do you think balance sheet size is important (e.g. Citi vs. Lehman)?

IBD:
What do you feel the difference is between equity research, credit research and investment banking? why do you think there's a difference in the type of work? How much interaction do investment bankers have with the research people? What is the role of the investment banker after a deal has been executed? How is the work different between pitching for a deal & executing a deal? How does the type of work change as you become more senior in the firm? Whats the difference between the product and industry teams?

Sales/Trading:
How would you define our (e.g. Goldmans) risk appetite? V good question! If the interviewee starts talking about VAR of different banks it will sound VERY impressive. What use is an MBA to a trader? What is the most important attribute in a trader? What does a salesperson do? What makes a good salesperson? How does the sales desk make money? How closely do traders and the sales desk work together? Where does research fit in this? How do the sales desk and IBD work together?

London Business School Finance Club

Interview Question Book

Competency: Commercial Orientation

Competency: Commercial Orientation

IBD:
What are the different types of valuation methods, and what are the pros/cons of each? Which type of valuation method usually results in a higher valuation price? If you're advising a company on a bid, and a private equity firm is bidding for the same target, would you expect the private equity firm to bid a higher price than the company you're advising? why or why not? Walk me through a DCF How far out would you forecast cash flow in a DCF? What discount rate would you use for valuing VOD, BP, ITV? What is the impact of decrease of goodwill depreciation on cash flows? How do you extract FCF from EBITDA? Conceptually, what is EBITDA and who does it differ from operating CF, FCF? (you dont want just to hear what the abbreviation stand for, but the economic/ financial meaning of these measures) Santander and Abbey merged sometime back, discuss the reasons that these two retail banks would merge. Would it make sense for Deutsche Telekom to merge with BT (EMI to merge with Warner Music, etc)? Would it make sense for Vodafone to acquire Vivendi Universal? Anything along these lines How would you value growth companies? Talk me through a DCF valuation, and show me how you would progress to an EFCF number from OFCF How, if at all, do different choices of depreciation accounting affect FCF? What is beta? Give me an example of (i.e. name) a high/low beta company? Can you tell me about a deal that [XYZ bank] has been involved in?

If a company were do be doing a high yield debt issue for a MBO/LBO, what are the five things you as a debt investor would look at? What is working capital and why does it matter? In an LBO/MBO scenario, would you as an investor prefer a company with high or low working capital requirements? Market prices 20% probability of company X being taken private (via LBO or MBO). You firmly believe its a 100% probability. How will you invest in X (what asset class? Short or long?) How would you value a hotel by using DCF? Where would you get your inputs for the model? Run through all details of the model [e.g. sales, taxes, discount rate, TV, etc.] (in hotel/retail industries, companies often own their real estate, which could form a substantial part of the valuation) What would Vodafones Cost of Debt be approximately? What sort of synergies can be extracted from a merger? 6

London Business School Finance Club

Interview Question Book

Competency: Commercial Orientation

If an acquisition of a $100m business has synergies of $20m, whats the most you would advise your client to pay for the business? If the market price of the target has shot up to $120 (price before takeover rumour is $80) and you are the sole bidder willing to pay only $110, how would you convince the target that you will pay $110 and not $120?

Two companies, one with P/E of 20 and another with P/E of 10. If 20 buys 10, will it be accretive or dilutive, and why? (this was an actual calculation)

London Business School Finance Club

Interview Question Book

Competency: Commercial Orientation

Sales/Trading:
Would you rather make money via: (1) trying to create a complex structured product that guarantees you a return after hedging all of your risk or; (2) taking a view on the market? How would you allocate assets for investment? How do you price a (european) swaption? How is a credit default swap quoted? How would you price a credit default swap? If CDS is rising (falling), what does it tell you about the debt quality of the quoted company? If you are short CDS in the rising (falling) market will you double up or cover? Suppose you have a call. S(0)=120, K=100, P(option) = 30. the value of this option has two components to it. what are they and how much is each worth? How much do you pay for a 5% 5-year zero-coupon bond? How do you hedge convexity? What is duration of a bond? What is bootstrapping? What rate of return would be adequate for you on an investment grade/high yield investment? Would you rather invest in equity of a utility company or in a high yield bond of a telecom company? What is the difference between LIBOR and Bank of England rate? (numbers will be good, but you are after the reasons why the former will always be higher than the latter.

London Business School Finance Club

Interview Question Book

Brainteasers

Brainteasers:
In general, banks love to use these to test your logic and reasoning under pressure. Key is to talk out the problem, logically and coherently. Do not clam up! Most importantly, brainteasers can be practiced and improved upon, use the winter holiday to practice each day. It is highly suggested to purchase one of the books below and practice, practice, practice!!

Recommend resources:
1) Timothy Cracks, Quantitative Questions to Finance Interview Questions 2) Vault Guide to Quantitative Interview Questions

Sample Questions:
What is the P/E of one pound? 10% chance of dying every time you cross the road. What is the probability that you are alive after trying to cross the road 10 times? What is the probability of pulling the same number from a deck of cards 3 times? What is the square root of 0.40? It is 1:05pm. How many degrees are between the hour hand and minute hand? What is 17 times 8.5? You have a cubic room, 10 x 10 x 10, with little 1 x 1 x 1 cubes inside. If you paint the surface area of this cube. How many little cubes have no paint on them? You have two jugs, 3L and 5L. How do you measure out exactly 4L of water? What is 34 squared? What is the square root of 3? What is the sum of the numbers 1-20? There are two equally sized glasses of wine, one white, one red. You put a spoon of one wine into another, stir, and put a spoon of the mixture back in the first glass. In which glass the concentration of the initial product is higher? (answer: the concentration will be equal) What is 3/16 of a percent of 1 million? What is 3/8, 5/8, 7/8, 1/32 in decimals (bond traders like this, because thats how coupons are quoted). What is a teenie?

London Business School Finance Club

Interview Question Book

Fit

Fit:
Do you prefer to lead groups, or be a follower in a group? Tell me about a time when you've worked in a team Describe a complex piece of analysis you've done, and how you communicated it in a simple way Describe a situation in which you've had to negotiate, or convince people to buy in to your view What other banks have you applied to? Why do you want to work for this bank? What other banks are you applying to? Walk me through your background, and how that applies to your future Given your non-finance background, what do you think would your new colleagues in the bank think about you? What do you think their opinion will be and how you will address it? How do you react to feedback? Criticism? Have you ever had to adjust your voice/behaviour for the audience/people you deal with? Describe me a situation when you had a heavy risk. How and what did you do? Give me an example of when you had a situation without any clear solution. What did you do? Walk me through your resume What skills did you learn at each job? Can you give an example of a situation when you have successfully managed a project? Do you have any sectors of preference? How did you work together with colleagues in your former job? If we asked your former colleagues about their opinion about you, what would they say? Can you remember a situation where you had an opposing opinion on a deal? How did you communicate that and what was the result? What are your major strengths and weaknesses? What skills do you think you bring to investment banking? What other options did you consider before choosing to do an MBA? Why MBA now? Why LBS? If you don't get an internship in banking, what will you do? Have you thought about IBD vs. Capital Markets vs. Global Markets as options? Why do you want to live/work in Europe? What would you do if we assigned you to a group that is not one of your top choices? Describe a time when you had a hardship in your personal life. Why did you choose job ABC (e.g. first job after undergrad)? Why here in Europe? Are you applying to any positions in US, Asia? How would you motivate an analyst who has worked 100/110/120 hrs for the past 4-5 weeks? How do you feel about working long hours?

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