Despite our name, we are very interested in expanding the investment analysis and asset management segments of our website because we love investing (which does not make up for some of the awful calls made littered over the site such as our USDCAD bet – evidence to disregard certain sell side research).
As such, we have curated some select asset management questions that are par for the course for any junior fixed income positions (including Debt Capital Markets). Standard credit questions that would be expected from a corporate banking or counterparty credit interview would also be fair game.
Topics will include duration (for individual securities and portfolios), convexity, credit analysis, metrics (leverage, coverage), macroeconomics (interest rates, sovereign risk, inflation, foreign exchange), bond indentures (legal contract for the bond issue), and a bond pitch.
Investment Grade Fixed Income Interview Questions
- Bond A and Bond B mature in 10 years and are of the same credit quality. One has a 3% coupon and one is a zero coupon. Which one has a higher duration?
- How do you calculate the duration for a portfolio of bonds?
- What is convexity? What bonds would exhibit negative convexity?
- Where are rates going?
- Where is inflation going?
- What is the Federal Reserve going to do in the next year and why?
- What is the mandate of the Federal Reserve?
- Who is the Chair of the Federal Reserve? What about before her? What about before him?
- What is the Bank of Canada going to do?
- What is the People’s Bank of China going to do?
- Who is Mario Draghi?
- What is relative value analysis?
- What are some bond covenants that you would commonly see?
- Why would some sub-investment grade debt have very weak covenants (pertaining to fallen angels)?
- What sector are you overweight on? What sector are you underweight on?
- If you have an in the money convertible bond, should you convert before maturity?
- The answer is no because you get a coupon while you hold the convertible and two you have a built in put option as if the stock price declines, you have the full principal of the bond as a minimum return. You can convert at maturity.
Leveraged Finance / High Yield Bond Investing Interview Questions
This is important for bonds across the credit investing spectrum / risk continuum. The spectrum includes liquid credit (high yield bonds with standardized indentures that can be widely traded) but also illiquid credit. Illiquid credit, and once bonds become sufficiently distressed, are better served by reading our distressed debt interview questions guide.
What are some key terms that you would look at in an indenture?
These exist in investment grade/high grade bonds as well, but usually investors are not as concerned about the credit risk as for junk/high yield bonds – keep in mind that high grade bonds will move with underlying risk free interest rates and broad market sentiment when the credit spread between risky and riskless securities tightens or widens while high yield bonds are more of a reflection of firm-specific credit risk
- By extension you would care about the yield-to-worst (for IG usually look at yield-to-maturity or YTM as there is rarely an embedded call), which will be a function of the coupon and the discount to par (where you will be compensated by the pull to par provided no default)
- Amount (issued and outstanding)
- Governing Law (New York?)
- Guarantors (OpCo? Parent?)
- Ranking/Priority (Senior Secured, Subordinated?)
- Events of Default (and what constitutes a hard default or soft default, as well as associated cure periods)
- Change of control put (usually at 101% of par after a defined period if the purchaser is less creditworthy)
- Incurrence Covenants (unpermitted mergers, debt issuance, asset sales, payments, and relevant baskets or materiality thresholds)
What is a cross-default?
When an event of default (EoD) occurs in another security cross-referenced in this specific bond indenture, the bond is now also in default. This is not just for bonds but any other creditor security.
So for example, if there are notes maturing 2023 and 2025, and a coupon is not paid on the ’23s and not cured – the ’25 notes will be in default as well.
However, there usually is a permissible basket for how much needs to be in default before a cross default is declared.
What is acceleration?
Acceleration clause allows for the creditor to force the borrower to repay immediately. There may be cross-acceleration clauses for fixed income securities.
Usually, it will be written into the bond indenture that a holders with a set percentage of total principal is needed to force an acceleration.
What is an amendment?
The creditors agree to amend certain terms of the credit security. For certain terms, there may be certain thresholds that need to be met before the indenture can be amended, both in terms of total value of principal as well as % of outstanding bondholders. For fundamental terms, it may require agreement of 100% of bondholders.
This will often need to come with a sweetener if the company is distressed – whether in the form of additional basis points of cash upfront or equity warrants.
What is a waiver?
Usually when a borrower is bumping up against a covenant and wants more room, a waiver to the rights of the creditors allows for a default or anticipated default to be cured or rescinded.
In frothy markets where the borrower is otherwise healthy or in the case of bank loans, there is a lot of investment banking revenue to be made off of the client, the creditors may waive certain covenants for a nominal fee (or in the case of bank loans, nothing).
In volatile markets, this will usually come with a more punitive concession.