simple sample questions for financial services interviews

This starts out as a grab-bag of questions, but will evolve over time into separate categories. These are all quite simple questions that are fair game in any financial services interview.

1. what is the capital structure of a firm? Explain the Miller-Modigliani Theorems.
2. what is the difference between debt and equity financing? explain the different ways in which a company can obtain financing.
3. what is the difference between disinflation and deflation? what is the difference between deficit and debt?
4. explain how you would compute capex from financial statements.
5. what are some differences between stocks and bonds?
6. what are derivatives? what are Greeks?
7. what is fundamental analysis? quantitative analysis? technical analysis? what is ratio analysis? explain with examples. what ratios would you focus on while picking stocks?
8. what is the Black Scholes model? what are some other ways of pricing options?
9. what is stochastic volatility? what is local volatility?
10. what is liquidity risk? how would you measure it?
11. what is the yield curve? what does it tell you about the condition of the macro-economy? what are key rate duration or KRD points? what is interpolation?
12. what is the impact of interest rate hikes on various financial instruments? stocks? bonds? commodities?
13. what is the difference between fiscal and monetary policy?
14. what is the difference in roles between the Federal Reserve and the Department of the Treasury?
15. what is a foreign exchange rate? what is triangular arbitrage?
16. what are futures? forwards? how are they different?
17. what is a "commitment of traders" report? what does it tell you?
18. what are the various ways in which you might value a security?
19. what are interest rate swaps? uneven swaps? total return swaps? variance swaps? what is a day count convention? why is it important?
20. what is portfolio immunization? how does it work?
21. what do you understand from "market micro-structure"?
22. what is back-testing? how is this carried out? what is data mining, why is it dangerous?
23. what is machine learning? how do you think it can be used in Finance?
24. what is the difference between a balance sheet and income statement?
25. what is VaR? what does it tell you? what is estimated short-fall (ES)?
26. what are the different ways of measuring VaR? give examples of each.
27. what is a bond? what is a callable bond? a putable bond? a floater? a sinker?
28. what is PPP? what is the big Mac index?
29. what is an index? what are the different types of indices? what is an ETF? how does it work?
30. what is a real option? explain with a simple example where and how you would use one.
31. (*) what is "contingent claims analysis"?
32. what is credit risk? explain with an example how you would analyze credit risk.
33. what was the "flash crash"?
34. explain with examples the different kinds of exchange rate regimes. what is a dirty float? currency substitution? currency board? a currency union?
35. what is volatilty? how is it measured in the stock market? in the bond market?
36. what is a regression? what is a t-statistic? what is R2?
37. what are some things you would check when you run a simple linear regression? what are some advantages of a regression analysis? disadvantages?
38. what is correlation? how is it different from causation?
39. what is the difference between correlation and covariance? how do a correlation matrix and the corresponding covariance matrix relate to each other?
40. what is the CAPM? what is Beta? what is alpha? True or False: "capturing alpha is a zero sum game, Beta is not." True or False: "higher risk investments produce higher returns". True or False: "Retained Earnings are an asset." - why, or why not?
41. what are some measures of portfolio performance? what is the Sharpe Ratio?
42. what is modern portfolio theory (MPT)?
43. what is a mortgage loan? explain why it is an amortizing loan, and how such loans work. what is a negatively amortizing loan?
44. you are given 100M USD to invest. explain in the current economic context how you would invest it, and why. also factor in major likely sources of economic uncertainty on the horizon and explain how you would manage your portfolio through these events.
45. what are convertible bonds?
46. what is a bail-out? what is a bail-in? how are they different? explain with examples.
47. explain "taper tantrum". pick a financial crisis, explain which countries were affected, what happened then, and how things were eventually resolved.
48. what is principal components analysis? how does it work?
49. what is the volatility surface? what is a vol-cube? how is it useful to price options?
50. what is the difference between implied, historical, forecasted, and realized volatility? (*) what is GARCH?
51. explain the advantages and disadvantages of using the normal distribution for modeling stock returns.
52. what is bond duration? how is it different from maturity? what is Macaulay duration? effective duration? how does coupon size affect duration? can an instrument have negative duration?
53. what is convexity? can bonds have negative convexity? explain.
54. what is the skewness of a distribution? kurtosis? 
55. (*) what is DxS? what is spread duration?
56. what is contango? what is normal backwardation? what is backwardation? how are backwardation and normal backwardation different if at all? can you have contango and normal backwardation at the same time?
57. explain compounding with interest rates. derive the formula for continuous compounding.
58. what is arbitrage? what is index arbitrage? risk arbitrage? give an example.
59. what are the different types of options? explain with examples.
60. what is leverage? how does it work? why would increased leverage increase risk?
61. what is the difference between the real and the nominal interest rate? what is inflation? why is gold considered an inflation hedge by some? what are TIPS? how do they work?
62. what is a stop-loss? what is a Japanese candlestick? what is a technical indicator?
63. what is a credit default swap? how does it work?
64. what is the difference between being illiquid vs. being insolvent?
65. what is margin? what is initial margin? variation margin? what is a margin call?
66. (*) what is geometric Brownian Motion? why is it useful in finance?
67. what is the normal distribution? what is the height of a standard normal distribution (mean 0, standard deviation 1)?
68. (*) what is a Markov Chain?
69. (*) what is a martingale?
70. what is Monte-Carlo simulation? when would you use it? explain with an example.
71. what are on-the-run and off-the-run securities? which ones are more liquid? more expensive? why?
72. what is sub-prime mortgage debt? what are AltA mortgages? 
73. what are asset-backed securities? what is a collateralized debt obligation (CDO)? what are REITs? how do they work?
74. what is securitization? what is collateral? what is over-collateralization? what are recourse and non-recourse loans?
75. describe the functions of rating agencies? give examples.
76. what is the difference between investment grade and high yield debt? what are debt covenants? how would you evaluate them?
77. what happens to stock and bond holders' investments in a firm if it goes bankrupt? what is the difference between chapter 7 and chapter 11 bankruptcy?
78. what is a hedge? what is a hedge ratio? what does it mean to say you "roll a hedge"?
79. what is mean-variance optimization? how does it work, and what does it do?
80. what is the capital market line (CML)? the security market line (SML)?
81. what is diversification? how many stocks or bonds do you think you need to hold in a portfolio for risk to be diversified? why?
82. (*) give examples of leading, lagging, and contemporaneous economic indicators that might impact markets.
83. what is senior and subordinated debt? what is a mezzanine tranche?
84. what is the difference between US Treasury and corporate debt?
85. what is an IPO? (*) what is a reverse IPO? how does it work? what is a hostile takeover? what is a poison pill provision?
86. what are primary and secondary markets? what is the meaning of the terms "exchange traded" and "traded OTC"?
87. (*) what is the Taylor Rule? 
88. (*) what is Okun's Law? 
89. (*) what is the Beveridge Curve? 
90. (*) what is the Philips Curve? what is money velocity?
91. what is trade surplus? what are twin deficits? explain the impact of a country's exchange rate on its trade with examples.
92. what is balance of payments accounting? how does it work?
93. what is hyper-inflation? what is deflation? what is quantitative easing? what do you understand from the phrase "Operation Twist"?
94. (*) can a company have negative shareholder equity? what does it mean?
95. what are retained earnings? how does dividend policy influence stock price?
96. what is sector rotation? how does it help?
97. what is a benchmark? what is a peer-group? how do these factor into portfolio management?
98. what is the difference between financial and managerial accounting?
99. what is a recession? what would you do as Fed Chair if the USA was in a recession? what is the Fed dual mandate? how does the Fed's mandate differ from those of other central banks e.g. BoE and ECB?
100. explain some ways in which firms can use accounting tricks to make their financial statements look better. say what you would do as an analyst to uncover these tricks and evaluate the true quality of a company.
101. what is arbitrage pricing theory (APT)? what is the Fama-French 3 factor model?
102. what is FCF? what is EV? what are some ratios you would consider with these quantities to evaluate an investment opportunity?
103. what is value investing? how is it different from growth investing?
104. what is scenario analysis? what is stress testing? how does it work? explain with an example.
105. what is tracking error volatility or TEV?
106. why does a company like Apple with so much cash take on debt?
107. are savings deposits assets or liabilities from a bank's perspective? (careful!)
108. explain how you would evaluate which projects a firm should take on and which it should reject. compare and contrast at least three different modeling techniques.

More questions:

1. What is the Fed Funds rate? What is the Fed Discount rate? How is the latter different from LIBOR?
2. What is the TED spread? The LIBOR-OIS spread? What is their significance?
3. What is a currency war? How does currency devaluation impact trade?
4. When does the central bank raise rates? cut rates? why?
5. What does the changing shape of the yield curve tell you about the broader macroeconomy?
6. What is a curve flattener? steepener? what is a bull/bear steepener/flattener? How is it different from a bear/bull steepener/flattener?
7. What are curve trades? Give examples of how you could put them on.
8. (*) What is the Nelson-Siegel-Svensson method? Where and how is it used?
9. A stock has low correlation with its index but a high beta. Is this possible? Explain.
10. Explain the concept of a macroeconomic cycle and give two examples of sectors or asset classes that tend to do well in particular conditions.
11. What do you understand from the term 2y forward 3y rate? 
12. Which is a riskier investment, a treasury bond or a junk bond, and why? (Careful)
13. What is the likely impact on an equity portfolio if the Fed raises rates? How would you minimize the impact?
14. What is the likely impact on an equity portfolio if the yield curve flattens? steepens? How would you minimize the impact in adverse scenarios?
15. Pick any famous investor. Explain his or her investment methodology, discuss its performance.
16. What is private equity? How does it work?
17. What is venture capital? How does a start-up avail of and use this source of funding? How is it different from more general private equity?
18. What is a stock split? What is a reverse stock split? Give an example of a situation where a stock split and a reverse stock split might be advantageous to a company.
19. You are an equity portfolio manager. Describe how you would handle subscriptions (money flowing in) and redemptions (investors asking for their money back). 
20. [continues previous question] Describe how you would measure the relative liquidity of your holdings. Explain how you would manage redemptions if some subset of holdings suddenly became more illiquid.
21. What are exotic options? Illustrate with an example. 
22. What are second order greeks? Explain. Where would these potentially have uses?
23. True or false. The delta of an option gives the probability that an option finishes in the money. (If false, which options greek, if any, gives this probability?)
24. What is the put-call parity theorem, and what applications does this have?
25. Are the following equivalent? (a) selling a call, or (b) buying a put? Why or why not?
26. Are the following equivalent? (a) selling a put or (b) buying a call? Why or why not?
27. Explain what a covered call is, and how you might use it to generate potentially better returns.
28. State the Black Scholes equation. Prove it. Next, working through each of the input parameters, state what happens as it takes values at the extreme ends of its ranges, all other parameters remaining the same.
29. What is the volatility smile? How might it be useful? (see also question 49 above)
30. What is a moving average? What is an exponential moving average? What is the difference between them? Which one moves faster relative to the data series over which the averaging operation is performed?
31. What is a cross-currency swap? How is it useful?
32. Which are the only US companies to have a AAA rating?
33. What is Ito's lemma? Where is it used?
34. (** expect these only if you are going for a quant interview, especially with an MSCF degree) What is the Reimann-Steiltjes integral? How is it different from a Lebesgue integral? 
35. (**) What is the Radon-Nykodim theorem? 
36. (**) What is Grisanov's theorem?
37. (**) What is a P measure? Q measure? What is the difference between them?
38. Describe in some detail the steps you would follow to go from conceiving of a trading or investment strategy all the way through implementing it.
39. (*) what is the Kelly Criterion? what is the gambler's ruin problem?
40. Can two managers have the same volatility of returns but different betas? Can they have the same betas in their performance but offer different volatilities of their returns?
41. Are the rates on the yield curve annualized rates?
42.