The toughest investment banking interview questions

Within the next few weeks, investment banks will start inviting their favourite applicants in for interviews. Full time analysts are typically interviewed first, with summer analysts usually interviewed from November onwards. If you’re going for a front office job, expect a grilling. Banks will be testing a combination of your industry knowledge, passion for the industry and motivations for wanting to join them.

It's not just technical questions you need to bone up on. In fact, some of the hardest questions can be those testing your motivations, so be prepared.

So, what are the toughest interview questions banks like to ask graduate hires? We've listed them below, along with some ‘ideal’ responses from experts – Peter Harrison, a former Goldman Sachs banker who now runs Harrison Careers and Marc Hatz, a former M&A associate at both Goldman Sachs and Perella Weinberg Partners, who now helps students get into investment banking and Roy Cohen, a career coach and author of The Wall Street Professional’s Survival Guide.

1. Do you know how to perform a LBO analysis?

Marc Hatz's suggestions:

“This is the short answer.

“Equity returns (IRR or cash on cash multiples) are calculated based on the investor's entry and exit equity values. So to calculate an LBO return, you want to find out the investor's projected equity value at exit: the investor entry equity value you already know (it is the equity amount the investor is injecting to acquire the company).

Now, equity value at exit (we will assume exit happens in year 5) simply is the company's selling price (say, 10x LTM EBITDA), minus net debt. In our example, 10x is the price at which the company is sold. EBITDA in year 5 comes from the company's income statement projections (management / investor projections). Net debt in year 5 is debt in year 5 minus cash in year 5. Debt in year 5 is debt at entry plus debt increases (typically 0) minus debt repayments over the investment period, as reflected in your debt schedule (assuming an amortizing tranche, the debt balance gradually reduces along the years as cash flow covers principal repayments). The company's cash balance at exit is based on initial cash balance plus cash flows generated over the term of the investment (the bottom line in your CFS every year).

And the IRR formula is (investor's exit equity value / investor's entry equity value)^(1/n)-1. The cash on cash formula is (investor's exit equity value / investor's entry equity value).”

2. Why sales? Why trading? Why research? Why asset management? Why private wealth management?

Peter Harrison's suggestions: 

"This is less of a question-and-answer and more about advice that will set you apart from other candidates in a very meaningful way. Most candidates know the correct way to answer the above questions (you list 3-5 reasons why you love this area and why you think you would be good at it. Ideally within 90 seconds.)

However, you will set yourself apart if you can produce something written, in the form of a mini-report. For Sales, this will be a 10-page business plan about how you plan to build your sales franchise. Same for PWM. For trading, it will be three trading ideas. For research, you can synthesise a research report you find online and use it to write you own research report (give the other report credit as a source).

For asset management, it will be an asset allocation, sector allocation (mentioning why you weight three sectors more and three sectors less), geographic allocation, and say, 4 shares or bonds you would invest in now. The report should look cosmetically sexy. The interviewer knows your plan/report has little value so appearance here counts for more than content. Let’s hire the candidate who went to all this trouble (5 hours??) to prepare properly for interview! Too far-fetched, I hear you think? No. We have used this exact technique for many years to ensure our candidates look better than others at interview. It works.

3. Tell me the ‘Greeks’ and why they matter

Peter Harrison's suggestions:

 “Most candidates can regurgitate delta, gamma, theta, etc, but fewer can explain in layman’s terms why they are so important. Part of a good answer is explaining what gamma would be: ‘We know delta is important because we have to get our hedge right. But we also care a lot about gamma because we need to know how fast delta is changing. If gamma is high, I will worry and know I need to frequently readjust my hedge.” This candidate shows me he really gets option hedging in a practical way. He can also explain it accurately and succinctly.

4. Do you have any questions?

This can be tricky. To say nothing is to create awkward silences, but you don’t want to make inappropriate references to compensation or anything a Google search will have revealed, says Hatz.

Marc Hatz’s suggestions:

“My first question has to do with the boutique model. I am trying to understand why boutique investment banks are more successful than bulge bracket banks in recession times. Is it simply because when you are a Morgan Stanley and weigh 30% of the market, whenever the market goes down, you would go down with it, whereas boutiques with a 2% market share cannot feel the hit? Or is there something else?”

“Another question if I may: a lot of boutique investment banks get into asset management on the side of financial advisory to compensate for the unpredictability of large deals. Is it a strategy that could interest you in the future, opening an asset management arm?”

“Back to my internship and more on the attitude side now, I know I have already given you my opinion on this, but I would find very interesting to hear yours: what do you think are the top three qualities for an intern to be successful at Alpha Partners?

“One last question, if you think we still have time. Very simple. Do you make offers at the end of internships?”

5. Explain how a convertible bond works.

Peter Harrison's suggestions:

“Most candidates can explain that it is a bond that can be converted into a share. We want more than that.

"A good answer might be as follows: ‘It is a bond with an option to convert into a share. If it is way in the money, I care mostly about its value as a share (this is called “parity”) and if it is way out of the money, I care much more about its value as a bond. Accordingly, I’m looking at the credit of the issuer to assess credit spread, and of course risk free rates also to determine my bond value.

“Most convertibles at issue have significant value as either a bond or a share – so I watch both the credit and the share price.”

"Note that we don’t want 5 minutes on convertibles. The interviewer understands them and simply wants to test the candidate’s understanding. The idea is a short answer to show understanding so we can then move on to test other technical knowledge. As a candidate, I want to demonstrate as much technical knowledge as possible, and that’s why I give short answers (which I am always ready to back up with further detail if required to).”

6. What’s your biggest weakness?  

Peter Harrison suggestions:

“In my opinion there are very few tough competency questions. Candidates sometimes mess this one up. Best to be honest to an extent. A good answer might be:  “Err…that’s tough. Let me think…Well first I have way less technical knowledge than you do, so I will be trying to learn as much as I can as quickly as possible if I’m lucky enough to receive an offer. I can be impatient and want things done quickly – sometimes I have to tell myself to slow down.  And I don’t like it when people don’t pull their weight. It’s quite a common thing at university.”

7. Why our bank? 

Mark Hatz's suggestions:

"I came to the firm for its people really. I believe it is sometimes hard to differentiate between a Megan Stanley, a Gildman Sachs or a Lassard, but knowing X, who is my current finance professor at university and also a former vice president at your bank, and having met with Y last week, who is also an alumnus from my school, I feel very excited about joining the team. They are extremely talented, but also show a true sense of integration and sharing. I look forward to working alongside them.

I have also had a chance to work both at a bulge bracket and at a boutique investment bank, and I think your firm as a boutique will offer me a better opportunity to learn from senior colleagues and receive extensive exposure to deals as a junior.

In other words, it is key to mention colleagues."

8. How do you spend your time outside work?

Roy Cohen: 

"The goal with "fit" questions is simply to determine whether you and future colleagues will be in sync with respect to personality and work styles.  There is no better question to get a handle on your temperament and priorities.  Imagine the difference between "a girls gone wild" response vs "I enjoy spending time in solitary activities". In responding to this question, you need to know first the culture of the organization and the team and what they value in terms of team "time". Some banks lean towards a hard work and hard party profile whereas others like Goldman Sachs prefer candidates who remember what they did the night before."

9. Did you get a full-time offer from your internship? [You didn't]

Peter Harrison's suggestions: 

OK, I appreciate this question doesn’t apply to many of you but I want to show you that much of interviewing is about giving the interviewer what she needs to hear. So here goes:

“No, unfortunately I didn’t, and I still cannot explain why not. I had thee reviews during my 10-week internship and they were all outstanding. At the half-way point, my MD indicated to me that I would receive a full-time offer. At the end of the internship I expected to receive a written offer within a few days. Instead, a graduate recruitment person told me that due to headcount restrictions I would not receive an offer. My MD told me circumstances had changed and that she could not make an offer now, but for me not to give up hope because they may later get headcount authorization. I would love you to call the MD and 2 VPs I worked with to ask them about me. I’m very confident that each would say that I performed really well and that I should be hired.”