Investment Banking Interview Questions (with Answers)

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Top Investment Banking Interview Questions (and Answers)

Investment Banking Interview Questions and Answers is to help you learn about the investment bankingAbout The Investment BankingInvestment banking is a specialized banking stream that facilitates the business entities, government and other organizations in generating capital through debts and equity, reorganization, mergers and acquisition, etc.read more interview topics. As a fresher in this field, I am sure you may have had questions about what and how to prepare for your first step in this finance world. There could be an unlimited number of questions that can be asked on investment banking topics, and since it is difficult to cover all of them here, we would be discussing a few of them which are important.

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Investment Banking Interview Questions (with Answers) (wallstreetmojo.com)

While reading through this write-up, it is suggested to actively keep answering the questions yourself before checking the correct answer. This will help develop the habit of brainstorming and answering these structured questions.

Investment Banking Interview Questions Explained

Investment Banking Interview Questions prepare one for the interviews to help them crack the interviews and enter the field of investment banking.

The interview nowadays does not have the typical questions being asked, including the basics of financial concepts. The interviewers want the candidates to think and avoid theories that everyone usually knows. Also, since these questions are technical, there would always be a correct answer, so if you don’t know a particular answer, don’t try and fake one. It is always better to confess that you don’t know.

The key to successfully answering these technical questions is to apply the concepts you’re learning and test yourself. Hope this has helped you learn some important questions and answers on investment banking topics and brings you steps closer to cracking the high-profile interviews.

Investment Banking Interview Questions have been divided into the following six topics.

  1. Accounting
  2. Corporate Finance
  3. Valuation
  4. Merger and Acquisitions (M&A)
  5. Initial Public Offering (IPO)
  6. Miscellaneous

Top Interview Questions & Answers

Let us have a look at the technical questions and their types; apart from these, you would also have to prepare for the personal questions, why investment banking Interview questions, and brain teasers which are usually part of testing the candidates.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Investment Banking Interview Questions and Answers Video Explanation

#1 – Accounting

Question #1

Tell me about the three most important financial statements and their significance.

This is one of the most commonly asked investment banking interview questions.

Question #2

If you have the chance to evaluate the company’s financial viability, which statement would you choose and why?

  • It would be the cash flow statement. The reason is that it provides a true picture of how much cash the business is generating in actual terms.
  • Hence, the cash flows are the main thing you pay attention to while you are analyzing the business’s overall financial health.
Question #3

Let’s say that the depreciation expense goes up by $100. How would this affect the financial statements?

Question #4

Imagine a situation where a customer pays for a mobile phone with a credit card. What would this look like under cash-basis vs. accrual accountingAccrual AccountingAccrual Accounting is an accounting method that instantly records revenues & expenditures after a transaction occurs, irrespective of when the payment is received or made. read more?

Also, look at this detailed explanation on Cash vs Accrual AccountingCash Vs Accrual AccountingCash accounting is the practice of perceiving the income and expenses only after the monetary receipt or payment. In contrast, Accrual accounting recognizes the income or expenses immediately after the services are provided or acquired, irrespective of the financial exchange.read more.

#2 – Corporate Finance 

Corporate Finance

Question #5

What is the formula for calculating WACC?

Do expect this investment banking interview question.

Question #6

There are two companies, P and Q, which are the same, but one P has debt, whereas Q doesn’t have any. In this case, which of the two companies would have a higher WACC?

  • In this scenario, company Q would have a higher WACC because debt is less expensive than equity.
Question #7

At this juncture, the interviewer might ask you why debt is considered less expensive?

#3 – Valuations

Valuation

Question #8 

Describe how a company is valued

This is another very common investment banking interview question.

Precedent transaction analysis

Comparable Company Analysis

  • Comparable company analysis is similar to Precedent Transactions Analysis, except you are using the whole company as an assessment unit, not the purchase of a company.
  • So to use this method, you would also look for similar companies to the one you are valuing and look at their price to earnings,  EBITDA, stock price, and any other variables you think would be a pointer to the health of a company.

Discounted Cash Flow AnalysisDiscounted Cash Flow AnalysisDiscounted cash flow analysis is a method of analyzing the present value of a company, investment, or cash flow by adjusting future cash flows to the time value of money. This analysis assesses the present fair value of assets, projects, or companies by taking into account many factors such as inflation, risk, and cost of capital, as well as analyzing the company's future performance.read more

Question #9

Which are the situations in which we do not use a DCF in the valuation?

Question #10

List the most common multiples used in a valuation

Valuation questionsValuation QuestionsThe most crucial valued interview questions are: what is free cash flow to the firm?, what is free cash flow to equity?, dividend discount model? and the difference between Enterprise value and equity value?read more are very common in investment banking interviews.

These are relative valuation techniques given below-

Question #11

Briefly explain leveraged buyout?

One of the technical questions.

Question #12 

Explain the PEG ratio?

Question #13

What is the formula for Enterprise Value?

  • The formula for enterprise value is the market value of equity (MVE) + debt + preferred stock + minority interest – cash.
Question #14

Why do you think the cash is subtracted in the formula for enterprise valueFormula For Enterprise ValueThe Enterprise Value Formula is an economic measure that reflects the entire value of the organization, including secured and unsecured creditors, equity and preference shareholders, and is more commonly employed in acquiring other businesses or merging two or more businesses to achieve synergy. Enterprise value Formula = Market Capitalization + Preferred stock + Outstanding Debt + Minority Interest – Cash & Cash Equivalentsread more?

  • The reason cash is subtracted is that it is regarded as a non-operating asset and because Equity Value indirectly accounts for it.
Question #15

Why do we consider both enterprise value and equity value?

Question #16

What does it signify if a company has a negative enterprise value?

#4 – Mergers and Acquisitions M&A

Question #17

Briefly explain the process of a buy-side M&A deal.

Question #18 
Briefly explain accretion and dilution analysis.

This one is another technical question.

Question #19

Given a situation where a company with a low P/E acquires a company with a high P/E in an all-stock deal, will the deal likely be accretive or dilutive?

  • Other things being equal, in a situation where a company with a low P/E acquires a company with a high P/E, the transaction would be dilutive to the acquirer’s Earnings per Share (EPS).
  • This is because the acquirer will have to shell out more for each rupee of earnings than the market values its earnings.
  • Therefore, the acquirer would have to issue proportionally more shares in the transaction in such a situation.
Question #20

What are the synergies and their types?

  • Synergies are where the buyer gets more value out of an acquisition than what the financials would predict. There are two types of synergies –
  • Revenue synergy: The combined company can cross-sell products to new customers or up-sell new products to existing customers. Because of the deal, it could expand in new geographies.
  • Cost synergies: The combined company could amalgamate buildings and administrative staff and lay off redundant employees. It could also be able to close down redundant stores or locations.
Question #21 

How does GoodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price.read more get created in an acquisition?

#5 – Initial Public Offerings (IPO) 

IPO

Question #22 

Briefly describe what you would do if you were working on an IPO for a client?

  • First of all, we would meet the client, gather all the necessary information such as their financial details, customers, and learn about the sector they belong to.
  • After this, you would meet other bankers and lawyers with the registration statement, which would describe the company’s business and market to its investors.
  • Next, you would receive comments from the SEC and keep revising the document until it is acceptable.
  • Now you would spend the coming weeks organizing roadshows to present the company to the institutional clients and convince them to invest in them.
  • After raising capital for the clients, the company would start trading on the exchange.
Question #23

What are the benefits of a company getting listed on an exchange?

  • It is an important step for a company to achieve liquidity.
  • Certain investors would want to invest only in exchange-listed issuers.
  • It helps the company establish a recognized value for its stock, which could also help it use the stock for acquisitions rather than cash.

#6 – Miscellaneous Questions

Question #24

What is in a pitch bookPitch BookPitch Book is an information layout or presentation used by investment banks, business brokers, corporate firms, and others to provide potential investors with the firm's main attributes and valuation analysis, which helps them decide whether or not to invest in the client's business. A pitch book is also known as Confidential Information Memorandum, which is used by the firm's sales department to help them sell products and services to a client.read more?

Pitchbook depends on the kind of deal the company is pitching for, but the common structure would include:

Question #25

Tell me a company you admire/follow and pitch me a stock

It would help if you structured your answer for such investment banking interview questions keeping in mind the following;

  • Give the name of the stock you have been following and the reason for the same.
  • Quickly summarize the company’s business.
  • Provide a quick overview of the financials to indicate its size and its profitability. Also if you can provide specific details on Revenue, EBITDA multiples, or its P/E multiple
  • Provide reasons for how the stock or their business is more attractive than its rivals.
  • It would be best if you spoke about the stock trend at least in the past 3-5 years.
  • You could also talk about the future outlook for the company.
Question #26

When buying a company why do private equity firmsPrivate Equity FirmsPrivate equity firms are investment managers who invest in many corporations' private equities using various strategies such as leveraged buyouts, growth capital, and venture capital. The top private equity firms include Apollo Global Management LLC, Blackstone Group LP, Carlyle Group, and KKR & Company LP.read more use leverage?

  • The private equity firm reduces the amount of equity to the deal by using significant amounts of leverage (debt) to help finance the purchase price.
  • Doing this will increase the private equity firm’s rate of return substantially when exiting the investment.
Question #27

What is convexity?

  • Convexity is a more accurate measure of the relationship between yield and bond price changes in interest rates.
  • Duration calculates this as a straight line, when in actuality, it is a convex curve, hence the name.
  • This is used as a risk calculation to tell how a bond yield will respond to interest rate changes.
Question #28

Define the risk-adjusted rate of returnsRisk-adjusted Rate Of ReturnsRisk-adjusted return is a strategy for measuring and analyzing investment returns in which financial, market, credit, and operational risks are evaluated and adjusted so that an individual may decide whether the investment is worthwhile given all of the risks to the capital invested.read more

This has been a guide to Investment Banking Interview Questions & Answers. Here, we list down the top 28 question-answers from six different finance subjects. You may also have a look at this Q&A to learn more –

Reader Interactions

Comments

  1. Diwakar Ajjarapu says

    Awesome…you made IB look easy and crystal clear. Thanks a lot.

    • Dheeraj Vaidya says

      Thanks for your kind words!

  2. mamta says

    It’s brilliant.. Thanks for sharing this!

    • Dheeraj Vaidya says

      Thanks for your kind words!

  3. vikash dhaka says

    Very helpful.

  4. Kiran Patil says

    simply amazing

    • Dheeraj Vaidya says

      thanks Kiran!

  5. Jaspal gidwani says

    Awesome knowledge you have shared.Thanks sir.

    • Dheeraj says

      My pleasure Jaspal!

  6. Zaie says

    Hey..thanks for this question bank..It is going to prove quite helpful for my interview preparations. Also if you could prepare a similar guide for the personal questions that could be asked in the HR round of interviews it would be great:)

    • Dheeraj says

      Thanks Zaie!