Investment Banking Interview Questions: The Only Guide You Need

Are you preparing for an investment banking interview? What are your presumptions? As a newbie, you may have wondered how to prepare for an interview and what questions to expect when you face the interview panel.

The reason for this self-help question and answer session on investment banking. It’ll help you to prepare you ahead of an interview and familiarize yourself with the likely questions you would be asked in an interview.

Now, while there might be a wide range of investment banking interview questions that you will be asked, I have narrowed them down to the most important ones.

  • A good way to answer these questions is to personally answer each of the questions yourself to see your knowledge of it before checking for the correct answers provided.
  • Note that the interview questions in this article are not the only investment banking questions available, so the questions might vary depending on the interviewers. The interviewer wants to be assured that you have more practical knowledge than theory.
  • They want to make sure that you understand the concept of investment banking, so if in the course of an interview, you are asked a question you don’t know, say you don’t know. It’s better than trying to pretend you do and answer wrongly. 

Now let’s jump right into these interview questions.

List of investment banking interview questions

1. Why choose the investment banking field?

Indeed, this is a fundamental question that could be thrown at you. The question sounds simple, but the employees have asked dozens of people the same question, and the response is somewhat different.

Suggested answer: 

They always expect a generic answer, like ” I want to learn more about investment banking, and this is a great way of getting started.

Your response is good, but rather than give a generic answer like others, use a more personal approach that shows how much investment banking means to you and what motivated you to go into it

You can say something like this:

My passion for investment banking started when I was in university. I had proposed my placement in a local financial firm, and when I got there, I discovered I loved the whole investment process. I helped one of their investors through the process by offering superb data analyses, and I succeeded in closing a deal for the company. I want to pursue my passion fully and work in a distinguished company where I can further contribute my quota in sealing more deals in the future.”

2. What is investment banking?

What is investment banking? This is still one of the basic questions you will ask, so be sure you have a good answer. 

Suggested answer: 

Investment banking is an exclusive financial service aiming to help individuals and companies improve investment and economic decision-making processes.

They also help companies select their finance method, whether to run with equity financing or debt financing, plus how to raise the capital for it.

Investment bankers are trained to work in the financial market and offer a cost-effective service to the buyer. They are known to act as the middleman between the company and the investors. 

3. How about an equity investment?

When discussing equity investments, you get to an investment’s technical part. So how do you answer this question like a pro who has done proper underground research? 

Suggested answer: 

An equity investment involves buying stock market shares. All the processes involved in buying company shares. If you purchase company shares in the stock market, you have made an equity investment.

4. As a prospective investment banker, how would you weigh the value of a company?

A more effective way of hitting the nail on the head while answering this question is to include at least some practical ways of measuring the value of any company

Suggested answer: 

I can apply a couple of methods when determining the value of a company. For example, I’ll use the following determinants:

●  The entire company’s assets worth

●  Company’s income level

●  DCF analysis estimation

Now, after properly analyzing these above-mentioned key factors to determine the value of the company, I can make an intelligent move as regards making a profitable investment decision.

5. What is discounted cash flow(DCF) analysis?

When you want to propose a forecast for an investment, you apply the DCF analysis valuation technique.

It’s important to use this valuation technique because it helps in projecting the value of an investment in the nearest future.

Suggested answer: 

Discounted cash flow analysis is employed to determine if the said investment will yield a profit at the end of the day.

The overall formula is used to check if the company has been doing well based on its current capital, assets, and liabilities.

6. What’s the difference between commercial banking and investment banking

The difference between commercial banking and investment banking is in the way of operation and the target audience. Commercial banks help clients make deposits at a specific rate and then give out loans to others with another interest rate. Investment banks act as the mediators between investors and corporations or governments looking to partner with these investors to raise capital for their businesses. The investment banker evaluates the stocks and bonds to ensure it’s profitable.

Tabular Difference Between Commercial Banking and Investment Banking 

Investment banking interview questions

7. What is your proposition about equity and debt financing? Which of the financing is better?

When a company is trying to salvage a financial situation, they want to employ the best financing method. What would be your advice on the financing method they should use, equity or debt? 

Suggested answer: 

You have to consider the volatility rate of both of them. While the equity volatility rate is higher, it’s a more profitable partnership but riskier.

On the other hand, debt involves less risky investment, and the returns are steady and consistent, but the interest expense should also be considered.

Evaluating the risks and returns involved in each will help you know the investment plan to use.

If the equity proves riskier, consider debt instead and vice versa. Having a company that has value will boost its opportunity for future investments.

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8. Briefly explain the three financial statements

Summary of the three financial statements

There are three common financial statements, namely:

●  Cash flow statements

●  Balance sheets

●  Income statements

Suggested answer: 

Cash flow statements

A financial manager uses a cash flow statement to determine the difference between the company’s previous closing amount and current closing amount.

Balance sheets

A balance sheet is used to determine the company’s assets and liabilities to know how the company is performing, including how and where to channel future investments.

Income statements

The income statement contains all the realized income and the company’s expenditures. It helps to determine the revenue the company makes over time.

9. Briefly explain to us what WACC is, and its importance to an investor

WACC refers to the weighted average cost of capital. WACC is a capital asset pricing model used to determine the company’s money.

Suggested answer: 

When checking the company’s cash flows, consider the different capital types and weigh their value. To calculate the WACC, use this formula:

WACC=Equity cost (amount of equity) + debt cost (amount of debt)-tax rate

Before deciding whether to go ahead with any investment opportunity, it’s essential to use WACC to determine the cost of the investment to know if it will be profitable.

After calculating WACC, the company can make a final decision.

10. Tell us about the risks you have taken in life and how they went?

This question is getting more personal with you to ascertain how you will handle risks associated with the investment banking industry.

Suggested answer: 

“Taking risks is part of life; when I want to take risks in any area of my life, I take calculated risks. I do a lot of research and analysis to ensure I understand the subject enough, including evaluating its possible downsides.

“That would help me in my career as an investment banker because the finance world is ever-changing with lots of new market trends, changing economies, and investment opportunities and competition from comparable companies. My skills in making analytical and logical projections skills would help me handle any unforeseen situation that would spring up in my line of duty.”

11. What is the difference between equity value and enterprise value?

When companies pool out their shares to investment banks, shareholders come in and buy some of those shares. 

Suggested answer: 

Equity value refers to the amount a company allocates to its shareholders in partnership with them from the shares bought in an investment bank.

Enterprise value refers to the total amount allocated to the capital providers that are part of the company.

12. Explain what CAPM is all about, and its application in investment banking.

CAPM is one of the financial models used by investment bankers to calculate the prospective returns of an investment.

Suggested answer: 

CAPM means Capital Asset Pricing Model, and before going ahead with any investment, it must be evaluated first for risk factors associated with it.

This will help the investment banker determine whether going ahead with the investment will yield returns and advise the client accordingly.

13. Why do investment banks advise a merger or acquisition? What is their significance in investment banking?

In investment banking, terminologies like merger and acquisition are common in everyday business.

Suggested answer: 

A merger refers to the agreement between two companies to merge and now work as a single company. In contrast, the acquisition is when a more powerful company buys over a smaller company.

Both mergers and acquisitions are important to a business.

As an investment banker, it’s essential to know this so well so you can offer better-consulting services to clients who want to take the next step in their business investments, whether to go for a merger or acquisition.

Investment bankers can advise clients on the best option suitable for the company and open them up for better future investment opportunities.

14. How do you determine an excellent financial model?

Achieving a good financial model is a challenging feat but doable.

Suggested answer: 

Determining if a financial model is good starts with the layouts and how it is presented. Identifying all the important stakeholders in the business, their roles, and duties, and making sure each one is correctly spelled out clearly. Hence, everyone knows how to function better to ensure a mistake-free calculation.

15. Where do you see yourself as an investment banker in the next few years?

The purpose of this question is to assess your seriousness and how passionate you are about your chosen career.

Suggested answer: 

A financial job requires lots of discipline and dedication, so I see myself smashing my goals and working hard in the bank to provide quality client services.

I see myself projecting the investment banking sector as a profitable career path that others would like to join.

16. What is beta in investment banking?

Beta measures an investment’s risk, including how the stocks would perform.

Suggested answer: 

The beta will reveal the relationship between the returns on the stock and the cumulative equity market value returns. This result will be divided by the changes in the proposed equity market returns. So, beta is usually a 1.0 in the market.

A more practical approach is that if a stock with a beta greater than one, it’s riskier. Similarly, if a stock’s beta is less than one, it is deemed less risky.

17. Tell us what you know about tax-deductible

Companies that make expenses at different times and stages for many reasons, and they often get tasked with it. Now, this is how tax-deductible comes up. What does it mean?

Suggested answer: 

A tax-deductible expense refers to a cost regarded as normal and vital for business growth. This tax-deductible expense helps to generate more revenue for the business, as it helps to reduce tax liability.

Before the tax is deducted, the business must be aware of it, and it’s usually removed before tax. The deductible tax is essential and good for the company’s growth or trade.

18. What is the risk-free rate of return?

When investing in a company, the investor can be part of a “riskless investment.” 

Suggested answer: 

Speaking frankly, no investment is not associated with risks, but often, if the risk level is significantly low, it is termed risk-free. A risk-free rate return refers to the rescue a shareholder gets from a riskless investment. It means that for every kind of investment, the investor will get not only the capital but a return too after a while.

Investment banking interview questions and the percentage of the questions projected 

Investment banking interview questionsPercentage of questions reported
Why choose the investment banking field? 19%
What is investment banking?4%
How about an equity investment? 3%
As a prospective investment banker, how would you weigh the value of a company? 4%
What is (DCF) Discounted Cash Flow analysis 23%
Commercial Banking and Investment Banking. What’s the Difference?4%
What is Your Proposition About Equity and Debt Financing? Which of the Financing is Better 3%
Briefly Explain the Three Financial Statements 4%
Briefly Explain What WACC is and Its Importance to an Investor3%
Tell us About the Risks You Have Taken in Life and How they went? 3%
What is the Difference Between Equity Value and Enterprise Value?4%
Explain What CAPM is all About? And its Application in Investment Banking. 3%
Why do Investment Banks advise a Merger or Acquisition? What is their Significance in Investment Banking? 4%

How Do You Determine a Good Financial Model? 3%Where Do You See Yourself as an Investment Banker in the Next Few Years?

What is Beta in Investment Banking?3%

Other questions to expect at investment banking interviews

Can you tell us some of these that can affect a stock portfolio?

What are firm valuation methods, and tell us their applications?

Do you have an idea of the recent market trends? And what can you say about them?

In your own unending, explain minority interest.

Final thoughts

Keep practicing and taking on more investment banking interview questions to ensure you have covered a greater percentage of the interview questions.

I believe that with the mock interview questions in this article, you can take on them and practice on your own.

Note that this article is constantly updated, so you should check back for even additions. 

The mock interview questions are well-researched, and each question is unique and depicts real-life situations in the investment banking sector.

Take as many interviews as possible to build your confidence and get acquainted with the industry.

Note: Going through a list of questions is a great way to familiarize yourself with the questions you might be asked.

It does not necessarily mean that these questions will come to you exactly as it is in this article.

So keep an open mind and expect varieties of questions.

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