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Can You Answer These 5: Investment Banking Questions V3

Banks are not in recruiting season (may be an off-cycle interview or two), which makes it the best time to get ahead of the curve and practice technical interview questions. The week before the interview is too late, as no one can learn corporate finance over 5 days.

Almost all junior bankers who are inundated with coffee chat requests have been adopting a strategy of asking technical questions during coffee.

This Week’s Questions

  1. Walk through $100 of 8% PIK notes for the three statements (Investment Banking)
  2. What are the drivers of Black-Scholes? (Sales & Trading)
  3. A bear walks north one mile west one mile and south one mile and ends up in the same place. Where is the bear? (Brain Teaser)
  4. Why would you issue preferred shares over debt? (Investment Banking/ECM/DCM)
  5. What is a convertible bond? Walk through the three statements and anything else that would be of interest.

Last Week’s Questions

Why is debt cheaper than equity?

Debt is cheaper than equity because it ranks ahead of equity in the capital structure. This means that the risk of holding debt is less than the risk of holding equity, so the return on equity must be higher than the return on debt for people to hold equity. Additionally, interest payments on debt are tax-deductible in most jurisdictions, which makes the effective cost of debt lower.

What is a simple option strategy if you expect a swing in price but are not sure on direction?

A straddle (buying a put and call with the same strike or exercise price and expiration date) is best in this situation.  This question is somewhat misleading as an investor would only enter into this straddle if they felt that the implied change in price would be much larger than the premiums paid, so if the swing was not large enough this may not be a good strategy.

What are non-farm payrolls?

Non-farm is one of the most important days in the economic calendar and refers to all jobs excluding farm workers, sole proprietorships, private household workers, and military and intelligence employees. The above items are stripped out to give a gauge of the economy’s health.

There is a magical waffle in a storage locker. Every minute, each waffle undergoes mitosis and turns into two waffles. At the end of an hour, the storage locker is full of waffles. At what minute is the locker 25% full?

The 58th minute. At the 59th minute it is 50% full, as it is ½ of 100%. At the 58th minute it is ½ of the 59th minute’s waffle content.

Nancy is in a room and $1 million worth of 99.9% pure gold appears. In order for her to keep the gold, she needs to take all of it out of the room at once. How does she do that?

She will just walk out of the room with the gold. The candidate will need to know the day’s gold price per ounce, but assuming it continues to be range bound between US$1,200 and US$1,400, and there are 16 ounces in a pound this is around 50 lbs.

Related Reading for Investment Banking

Investment BankingInvestment Banking Bake-Off or Beauty Contest · Investment Banking for Dummies · What Do Investment Bankers Mean When They Say “Sell Side” or “Buy Side”? · Acquisition Finance: Equity Consideration · Acquisition Finance: Bullet Debt · Acquisition Finance: Bank Debt · Working in Treasury · Should You Start Your Investment Banking Job Early? · Debt Capital Markets Analyst and Associate Work · M&A Process Walkthrough · Types of M&A Sell Side Processes · Block Trades/Block Sales · Dividend Reinvestment Plans (DRIP) · Investment Banking Teaser · Accretion/Dilution Analysis – Part IV: Synergies and Source of Funds for M&A · Accretion/Dilution Analysis – Part III: Using Debt for Acquisitions · Accretion/Dilution Analysis – Part II: Accretion/Dilution Math and Breakeven Premium · Accretion/Dilution Analysis – Part I: EPS, Earnings Yield and All-Stock Transactions · Purchasing a Company via Cash or Stock · Interview with: Credit Rating Agency Analyst · Why Investment Banking? · Breaking into Investment Banking as a Big 4 Accountant in Audit · Investment Banking Credit Ratings Advisory · WACC and Optimal Capital Structure Reviews · Investment Banking in Canada · Early Bond Redemption Analysis · Hedging Interest Rate Risk · Investment Banking Hierarchy – Analyst to Managing Director · How Has Investment Banking Changed Over Time? ·
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