Investment banking is a complex financial stream, so the people hired for this post are often MBAs or graduates from the top schools. They are expected to have a strong command of investment banking and its various instruments. Hence, it can take a lot of work for candidates to clear the interview and get a job. A lot of candidates make mistakes during their IB interview. The competition is very high and is expected to increase with more companies looking for investment bankers. So, if investment banking is your chosen field, you must know the mistakes you should avoid during the interview. This article is a complete investment banking interview guide to help you succeed in your next interview.
How to Prepare for an Investment Banking Interview
Before starting your dream IB job, you must clear your IB interview. You can expect two kinds of investment banking interview questions – quantitative technical and qualitative soft. Technical questions on valuation and basic accounting will be asked. However, it would help if you were prepared to answer questions on intrinsic vs relative valuation, discounted cash flow analysis, etc.
It would help if you also practiced challenging and complex brain teaser investment banking interview questions and answers. The interviewer can ask such questions to gauge how proactive you are to solve problems on the spot.
Why Do Mistakes Happen?
Most mistakes happen because people are not aware of the profile, industry-specific roles, qualifications, and skills needed for it. Hence, candidates make mistakes because of less information or inadequate investment banking interview prep. Let’s look at some common mistakes:
Insufficient Investment Knowledge
The biggest mistake is not knowing the field you are applying for. Your interviewer will expect you to be fully aware of the field, and if you fail to answer the basic investment banking interview questions and answers, it will be a red flag.
No Patience
As investment bankers, candidates need to be patient, and if someone gets frustrated quickly, it is not the right field for them. Therefore, it is best to be focused on solving problems during your investment banking interview process.
Too Much Emotional
Nobody wants an emotional candidate, and definitely not in investment banking. Investment banking is a highly demanding job and requires excellent communication. Therefore, companies look for candidates who know how to remain professional while being composed. Â
Not Indulging in Internships
Internships are a great way of learning the ins and outs of any profile, and investment banking is one such career in which experience matters the most. People who choose not to go for an internship and only wait for full-time employment may face issues with their lack of knowledge during their investment banking interview.
Investment Banking Interview Prep Steps
Let’s understand the investment banking interview process step by step below:
Understand the Interview Process and Timeline
The first step is understanding the process correctly, especially its stages. It can take around 3-6 weeks for the complete interview process and can even take up to 3 months in some cases. The typical interview rounds will be application and resume, aptitude test, hirevue video interview, and final round interview. You can also enroll in an investment banking course/certification from a reputed institute. It will help you to prepare and understand the process properly.
Research Your Target Firm
Interviewers can ask why you want to work specifically for them over other industries. Some questions can be: Why do you want to work for us? What makes our firm different from others? How will you describe our firm to others? What have you recently heard about our firm? To answer these questions, it is essential to research your target company properly.
Prep Answers for Common Questions
Preparing your investment banking interview questions is the most essential step of preparations. You must prepare yourself for three main categories: technical questions, behavioral questions, and business sense questions. 60% of questions will be behavioral, 26% technical, and 15% business sense-related.
Practice Out Loud
Once you have jotted down an outline for your interview, start preparing your answers by speaking them aloud. It is an excellent way of improving your communication during the interview. The motto is to answer the questions naturally through your memory without missing any information. Do a role play where you act both as an interviewer and a candidate.Â
Do Mock Interviews
Although practicing yourself is a great option, remember you can be biased in your interview. Moreover, practicing alone will not replicate real questions. Therefore, mock interviews are a must as they can give a close experience to real interviews. These interviews are a great way of getting feedback, identifying mistakes, and fixing them on time.
Investment Banking Interview Questions and Answers
Let’s look at a few questions and answers for your preparation:
Q1. How many hairstylists are there in the city? Explain with logic.
Ans. You can start by explaining the population of your city, average haircuts per year, and how many a hairstylist can do in a year. For example, a population of 2 million may get four cuts a year, which equals 8 million in total. If a hairstylist works 8 hours 5 days a week in 50 weeks, it will be 2000 hours. If the haircut takes 1 hour each, it will be 8 million divided by 2000 hours and thus 4000 hairstylists.
Q2. A lily pad in a pond doubles in size every day. The pond is now covered completely by the end of the 30th day. How much time will it take to get covered in half?
Ans. 29 days, since if it doubles each day, it also halves each day. Therefore, it will be half full in 29 days and full in 30 days.
Q3. How do you calculate a company’s valuation?
Ans. You can use either the multiples approach, where earnings are multiplied by the P/E ratio, the transactions approach, where the company is compared to other companies, or the discounted cash flow approach, where the value of future cash flows is discounted to the present.
Q4. Who is an investment banker?
Ans. An investment banker helps governments and businesses raise capital and provides help when any company wants to acquire or merge with another company. They are also responsible for different financial activities, such as underwriting deals for clients, arranging finances, equity financing, etc.
Q5. What discount rate is suitable for an unlevered DCF analysis?
Ans. The cost of the cash flows in an unlevered DCF analysis relates to both the lenders and the equity providers of capital because the free cash flows in that analysis are pre-debt (consider unlevered cash flows as the company’s cash flows as if it had no debt, so no interest expense, and no tax benefit from that interest expense). As a result, the discount rate is the weighted average cost of capital for all capital sources (debt and equity).
Q6. What is equity value vs enterprise value?
Ans. The company’s total present worth is known as its enterprise value, whereas the value of its loans and shares indicates its equity value and may be used to estimate its future worth.
Q7. A company’s cash flow is predicted to expand at a rate of 4% annually over the long run, with $200 in cash flow generated the following year. Investing in other comparable firms might yield an annual return of 10%. What price would you put on this business?
Ans. Cash Flow Growth Rate < Discount Rate, thus Company Value = Cash Flow / (Discount Rate – Cash Flow Growth Rate). The calculation for this one is $200 / (10% – 4%) = $3,333.
Q8. How to model an M&A deal?
Ans. There are several processes involved in modeling an M&A deal, such as:
- Establish the acquisition price and the financing plan for the transaction.
- To reflect the transaction, make necessary adjustments to the target’s balance sheet (goodwill, write-ups, new debt, etc.).
- Project finances for the merged business.
- Determine financial ratios and measures to assess the transaction’s impact.
Conclusion
Through this article, you can understand how to prepare for investment banking interview and be an expert in clearing your rounds. Remember to stay updated with the latest information and developments in your field to answer any questions the interviewer gives. Moreover, always remember to research the company adequately since each is different and has its own set of values and cultures.
FAQ’s on Investment Banking Interview Guide
How long to prepare for IB interview?
You must prepare at least 2-3 months in advance to clearly understand all the concepts.
How to clear an investment banking interview?
It would help if you studied accounting, finance, valuation, M&A, and LBO models to succeed in investment banking interviews.
How do I stand out in an IB interview?
Proficiency in accounting and capital markets is vital, as is being ready to discuss the financial markets and the economy.
What are IB interviews like?
In these interviews, the technical section assesses your proficiency with finance. The typical concepts asked in the interview are financial modeling, appraisals, M&A, LBOs, and DCF analysis.
