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Cryptodevlopers.com Review: Why This is a Risky Investment For You

Published: 22:31 BST, 19 October 2020 | Updated: 11:31 BST, 20 October 2020

Fears are mounting over troubles with ‘peer-to-peer’ companies as investors report slipping returns and delays to withdrawing funds.

These companies match people who want good investment returns directly with borrowers in need of loans.

But amid reports of a creeping fall in standards, the UK’s financial regulator is now seeking to tighten its grip with its first major clampdown since taking charge of the sector five years ago.

Businesses have just seven weeks to get their act together as the Financial Conduct Authority introduces a new set of rules to protect investors – including capping how much they can invest.

Bonanza: Funding Circle founder Samir Desai made £4million from the float

This squeeze on the industry comes in the wake of:

– Nearly £4 billion being loaned by investors in the UK in the space of 12 months;

– Investors complaining they did not understand the peer-to-peer arrangement they entered;

– Complaints of much lower returns than were advertised;

– Investors with one big provider – Funding Circle – suffering long delays to withdraw money;

– Two platform failures within 14 months, while others have disappeared from the market, been swallowed up by a rival or changed their business model entirely.

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HOW THIS IS MONEY CAN HELP

What is peer-to-peer?

These companies match investors seeking good returns with borrowers in need of loans.

Dozens exist, lending money to individuals and small businesses while taking deposits from people who can start investing with modest sums as low as £5 – though a £1,000 minimum is more typical.

Since the 2008 recession their popularity has grown rapidly among savers wanting above-inflation returns but without the volatility of investing in stock markets.There are now 275,000 lenders with funds in peer-to-peer platforms.

What is peer-to-peer? These companies match investors seeking good returns with borrowers in need of loans

Borrowers in turn have been lured by competitive loan rates, the flexibility to overpay without charges in some cases and modern online dashboards to keep track of repayments.

Peer-to-peer quickly changed from a niche idea for the few to a popular salvation for income-starved middle England.

It seemed a win-win for hundreds of thousands of people. So much so that investors have cumulatively loaned more than £17billion in the UK. Nearly £4billion of that sum has been loaned out in the last year, according to Brismo which provides lending performance data.

Who are the big players?

The most well-known and used names in the industry are Zopa, RateSetter, Funding Circle, Lending Works and Assetz Capital – though there are many more.

Zopa and Lending Works distribute investor money to individuals in want of a personal loan; Funding Circle lends to small business; while RateSetter lends to both individual and business borrowers. Assetz Capital lends to small businesses and property developers.

Funding Circle was floated on the London Stock Exchange last October – helping its co-founder and boss Samir Desai make £4million last year.

In terms of money invested, Zopa is the largest peer-to-peer firm. Its existence precedes the crash of 2008 and investors have loaned £850million through the platform in the last year.

In 2020, the company ditched its safety net scheme designed to restore investor losses if borrowers defaulted on repayments.

But Ratesetter and Assetz Capital still maintain ‘Provision Funds’ to compensate investors at risk of loss. Some of the interest repaid by borrowers on their loans is siphoned off to replenish the funds.

Why the worry over lenders?

Last year, Manchester-based peer-to-peer provider Collateral went into administration after it was found to be operating without regulatory authorisation. In May this year, property finance provider Lendy failed.

Clients waiting for their money back will likely have access to the £11million currently frozen in accounts by the end of this month.

Large sums of money are funnelled into peer-to-peer, but complaints are also emerging over proper disclosure of risk, the true rates of return that can be expected and access to money when it is demanded.

The regulator has long had concerns over misleading financial promotions in the peer-to-peer market – with some providers having overstated the returns and underplayed the risks.

In particular, when companies do not make it clear that rates of return are a ‘target return’ not a guaranteed one.

This is particularly important given a recorded slide in average returns across the major providers – steadily falling over two years and from a peak in 2020.

Concerns: The regulator has long had concerns over misleading financial promotions in the peer-to-peer market

Yields on loan-based investing are generally favourable – about 7 per cent according to recent figures – compared to UK Government bonds (currently 0.5 per cent on five-year offerings, for example), but people handing over their money do not always fully understand the deal they have entered.

Rupert Taylor, of Brismo, argues the need for a standard way for investors to compare providers. He says: ‘Loans can be a great new asset class, but it has got to be easier for investors to understand what’s going on.’

Martyn James, of online consumer complaints service Resolver, says investor complaints he has seen focus on fees and charges, higher levels of risk, unclear or misleading advertising and confusing claims about returns.

‘The FCA has been sending out clear warning signals about the way peer-to-peer lending has been sold to investors,’ says James.

‘As with any investment portfolio, you should spread your risk over a range of products – and always fully understand what happens if things go wrong.’

Neil Faulkner, of peer-to-peer research agency 4thWay, says: ‘The vast majority of peer-to-peer investors continue to earn positive and stable returns every year.

‘What has really caught the attention of the FCA is that investors are deficient in some essential basic knowledge about peer-to-peer lending.’

A strong example of this, he argues, is investors who don’t take a longer-term view when they put money in – perhaps because of confusion when platforms operate a secondary market. Faulkner adds: ‘Early exit by selling loans on to other lenders will not always be as speedy as investors hope.’

Under new FCA rules investors will only be allowed to stump up 10 per cent of ‘investable assets’ in peer-to-peer deals. This is essentially one tenth of your savings and investments minus any consumer debt.

Investors will also need to declare themselves on forms as ‘restricted’ or ‘sophisticated’ investors, much the same as those who invest in mini-bonds.

This action won’t be required if an investor has already taken regulated advice – basically getting the green light from an informed professional to go ahead and dabble.

Peer-to-peer providers will also need to up their game when it comes to providing more information to investors and what process will be followed if their platform fails.

They will also need to be able to back up any claims about ‘target returns’ to show those ambitions are reasonable to advertise.

Top 10 Risky Investments You Should be Careful about or Avoid In Nigeria

See the Top 10 Risky Investments You Should be Careful about or Avoid In Nigeria. Read further to discover why I have warned you.

An investment is any purchase of a good or service not necessarily for immediate use but specifically for generating profits in future. It literally means growing your money for continuous and additional profits.

Everybody needs financial security, people are afraid of getting broke in future, to amass wealth to maintain their standard of living for themselves and their children and to increase their security.

A good investment would generate profit for an entire lifetime and can be passed down from one generation to another. In these hard times where the economy seems to be degenerating yearly, it is a necessity to invest; there is a need to plan ahead because of the inability to predict the government and their dwindling pension and retirement plans.

What does a bad investment imply? What is a bad investment? Any investment with very low or zero rate of returns is a bad investment.

Businesses that appear profitable but deflate without warning are bad investments. Bad investments can be avoided when investors thread with caution, investors may need to seek the services of a qualified financial advisor to help especially with confusing investment.

When you are ignorant of how an investment works, you are likely to lose out massively because your lack of understanding will birth poor or wrong decisions on your side.

If an investment appears complicated, hire a professional to evaluate it or have nothing to do with it. Every investor needs to be cautious of investments with limited marketability and investments that require huge commissions.

Beware of investments that promise very high rate of returns with no information provided on risks; do not invest in a business you barely have knowledge of and as soon as an investment begins to show some warning signs, get your remaining assets out of it to save you from incurring a complete loss.

Top 10 Bad Investments You Should Avoid In Nigeria

1. PONZI SCHEMES

These are fraudulent investment schemes that promote high rates of returns on a very short term with little risk to existing investors for the purpose of enticing new investors.

They operate as legitimate businesses until they are no longer able to pay promised returns; they begin to die a gradual death. Ponzi schemes are awaiting disasters; they entice to destroy eventually. One of the first Ponzi schemes to gain grounds in Nigeria is MMM.

Its success birthed the emergence of many others which include NNN, Twinkas, Ultimate Cyclers, Zarfund, Givers forum and many more. Ponzi schemes gained momentum in Nigeria at a time when the economy was frail, the economy recession made matters as worse as people turned to Ponzi schemes for financial security and for an easy way out of poverty.

They actually provided brief relief to Nigerians and as expected, many reinvested and investors increased, Nigerians refused to see the threat these schemes posed and when they began to fail in their ability to pay up expected returns, many began to panic.

Investments stopped and huge amount of monies went down with the schemes, some business men totally lost their capital, others were left in debt, retirees lost their entire savings and till date people haven’t been able to get their monies back.

Read the Impacts of Ponzi Schemes on Nigeria economy

2. GAMBLING

This means to play a game of chance, to risk money or valuable possessions by bet or wager. Nigeria has legalized three types of gambling; sport betting, lottery games and casino gambling.

There are three operational kinds of gambling; lotteries, land based casinos and online gambling. However, a lot of illegal gambling goes on in underground casinos, football mafia, unauthorized lotteries and illegal betting sites. Many people have likened gambling to investment but I hold a different view because their underlying principles differ.

Gambling is a bet that sometimes leaves the gambler at a disadvantage irrespective of how smart he seems to be. You don’t own anything by gambling but you own shares, stock or bonds when you invest.

Gambling is a zero win venture that cannot be likened to investments. It is better to invest your funds than to gamble the away. It is way better to spend savings on a small scale enterprise like selling provisions and sachets of pure water than to spend it on naira bet with zero chance of winning.

3. MONEY LENDING

This is the act of giving out cash loans to those in need to be repaid on short terms at a very high rate of interest. Money lending can be done solely by individuals with the financial capability or a group of contributors who come together for the purpose of lending money on high interest rate.

It is prevalent in Nigeria today, a practise that sucks the poor dry as a result of the high interest rates which can be justified by the risk involved. In Nigeria, the laws regulating money lending are lackadaisical, parties involved are left at each other’s’ will.

You may lend money to someone and they abscond with it; sudden death also brings lots of bad debts to money lenders. It is a risky venture that may pay well at the onset but encounter lots of hindrances later on. Apart from this, money lending is exploitative.

4. THRIFTS

These are savings and loans associations that provide savings and loans services. In Nigeria, people join thrifts to raise funds for new or existing projects.

It is a quick way to financial liberty but the issue lies in security. Where anti-fraud checks aren’t put in place, a fraud can easily occur resulting a huge loss. So when next you want to be part of thrift, ensure that there are no loop holes.

5. REAL ESTATE

Investments in real estates can go wrong. Real estate is capital intensive, it is very essential to carry out findings and make use of professional help when seeking to invest in real estate.

There have been several cases of dubiousness involved in Nigeria regarding real estate investments, property owners have been said to sell a particular property to several people at the same time.

Where transactions aren’t properly structured and title of property isn’t properly secured, one may incur loss.

6. FOREX TRADING

The foreign exchange market is a market where currencies are traded. Currencies are traded to facilitate international trade and travel. For instance a Nigerian tourist in America must pay in dollars to see the sites and vice versa.

This explains why the foreign exchange market is the largest financial market in the world. One has to be careful when trading in the forex market because there is always a quick reaction to information released and this reaction influences the price of currency.

The current recession in Nigeria affects her exchange rate as the naira suffers and until the economy is quite stable, trading in forex may lead to loss of invested capital.

I will recommend that you learn how to trade Forex before you venture into the business

7. SEASONAL GOODS

Nigeria has two major seasons, the dry and rainy. There are goods that sell mostly in a particular season, for instance rain coats sell better when it rains as the demand is high. Selling seasonal goods in the wrong season is a bad investment that may cost you your business capital.

8. PERISHABLE GOODS

Sale of perishable goods can be a bad investment if not properly handled. Before you venture into selling perishable goods like fruits and vegetables in large quantities, you must ensure that your business is located at place where lots of customers can easily have access to you, for delay in sales will lead to a loss of goods and money.

9. CYBER CAFES

Before the internet boom, a cyber café was one of the most lucrative businesses. But with the recent development in phone production and affordability of data, cyber cafés are barely visited.

There is a whole lot you can do with a mobile device and most people do own printing, photocopying and laminating machines in their homes, as it is preferable to access the internet from the comfort of your home. Opening a cyber café now is not advisable as the returns will be low.

10. OWNING A MOTOR CYCLE FOR TRANSPORTATION

In almost every major city in Nigeria, motor cycles have been banned by the government and with time, there may be a total extinction of motor cycle transport.

It is better to own a tricycle fondly known as keke napep, which is safer and has been authorized by the government to replace the motorcycles. You can invest in transport business on a much larger capacity.

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Investment Banking Interview Questions (with Answers)

Top Investment Banking Interview Questions (and Answers)

The purpose of this Investment Banking Interview Questions and Answers is simply to help you learn about the investment banking interview topics. As a fresher in this field, I am sure you may have had jitters as to what and how to prepare for your first step in this finance world. There could be an unlimited number of questions that can be asked on investment banking topics and since it is difficult to cover all of them here, we would be discussing a few of them which are important.

While reading through this write-up, I would suggest you actively keep answering the questions yourself before checking the correct answer. This will help you develop the habit of brainstorming and answering these questions in a structured way. Please consider this as a first draft of the article. I will keep on regularly updating this with more questions and answers based on your feedback.

The interview nowadays does not have the typical questions being asked which include the basics on financial concepts. The interviewers want the candidates to think and avoid theories which everyone usually knows. Also since these questions are technical ones there would always be a correct answer, so in case you find yourself not knowing a particular answer, don’t try and fake one. It is always better to confess that you don’t know.

Investment Banking Interview Questions have been divided into the following 6 topics

#1 – Accounting – Investment Banking Interview Questions

Investment Banking Interview Question #1

Tell me about the three most important financial statements and what is their significance

This is one of the most commonly asked investment banking interview questions.

  • The three main financial statements are the Income Statement, Balance Sheet and Cash Flow Statement. Speaking about their significance, the income statement provides the revenue and expenses of a company and shows the final net income that it has made over a period of time.
  • The balance sheet signifies the assets of a company such as a plant, property & equipment, cash, inventory, and other resources. Similarly, it reports the liabilities which include the Shareholders’ equity, debt, and accounts payable. The balance sheet is such that the assets would always equal the Liabilities plus shareholders equity.
  • Lastly, there is a cash flow statement that reports the net change in cash. It gives the cash flow from the operating, investing and financing activities of the company.
Investment Banking Interview Question #2

In case you have the chance to evaluate the financial viability of the company which statement would you choose and why?

  • It would be the cash flow statement. The reason being that it provides a true picture of how much cash the business is generating in actual terms.
  • The cash flows are hence the main thing you actually pay attention to while you are analyzing the overall financial health of the business.
Investment Banking Interview Question #3

Let’s say that the depreciation expense goes up by $100. How would this affect the financial statements?

  • Income Statement: With the depreciation expense decreasing Operating Income would decline by $100 and assuming a 40% tax rate, Net Income would go down by $60.
  • Cash Flow Statement: The Net Income at the top of the cash flow statement goes down by $60, but the $100 Depreciation is a non-cash expense that gets added back, so overall Cash Flow from Operations goes up by $40. With no further changes, the overall Net Change in Cash goes up by $40.
  • Balance Sheet: On the asset side because of the depreciation the Plants, Property & Equipment goes down by $100, and Cash is up by $40 from the changes on the Cash Flow Statement.
Investment Banking Interview Question #4

Imagine a situation where a customer pays for a mobile phone with a credit card. What would this look like under cash-based vs. accrual accounting?

  • In the case of cash-based accounting, the revenue would not be accounted for until the company charges the customer’s credit card, obtains authorization and deposits the funds in its bank account.
  • After this entry would be shown as revenue in the income statement and also as cash in the balance sheet.
  • As against in accrual accounting, it would be shown as Revenue right away. But it would yet not appear as Cash in the Balance Sheet, rather it will be shown as Accounts Receivable.
  • Only after the amount is deposited in the company’s bank account, it would be reported as cash.

Also, have a look at this detailed explanation on Cash vs Accrual Accounting.

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#2 – Corporate Finance – Investment Banking Interview Questions

Investment Banking Interview Question #5

What is the formula for calculating WACC?

Do expect this investment banking interview question.

  • WACC = Cost of Equity * Proportion of Equity + Cost of debt * Proportion of debt (1-tax rate). Where, The cost of equity calculated using the Capital Asset Pricing Model (CAPM).
  • The formula is Cost of Equity = Risk free rate + Beta* Equity risk premium
  • Cost of Debt = The risk-free rate is basically the yield of a 10-year or 20-year US Treasury
  • Beta is calculated based on how risky are the comparable companies and equity
  • Risk Premium is the percent by which stocks are expected to out-perform “risk-less” assets.
  • The proportion is basically the percentage of how much of the company’s capital structure is taken up by each of the components.
Investment Banking Interview Question #6

There are two companies P and Q which are exactly the same, but one P has debt whereas Q doesn’t have any. In this case, which of the two companies would have a higher WACC?

  • In this scenario company, Q would have a higher WACC, because debt is less expensive than equity.
Investment Banking Interview Question #7

The interviewer at this juncture might ask you the reasons why debt is considered to be less expensive?

  • The answer is as follows; Interest on debt is tax-deductible (hence the (1 – Tax Rate) multiplication in the WACC formula).
  • Debt holders would be paid first in a liquidation or bankruptcy.
  • Instinctively, interest rates on debt are usually lower than the Cost of Equity numbers you see.
  • As a result, the Cost of Debt portion of WACC will contribute less to the total figure than the Cost of Equity portion will.

#3 – Valuations – Investment Banking Interview Questions

Investment Banking Interview Question #8

Describe the ways in which a company is valued

This is another very common investment banking interview question.

Precedent transaction analysis

  • This is also called as Transaction Multiple Valuation
  • This is when you look at how much others have paid for similar companies to determine how much the company is worth.
  • To use this method effectively you need to be extremely familiar with the industry of the company you are valuing as well as the normal premiums paid for such a company.

Comparable Company Analysis

  • Comparable company analysis is similar to Precedent Transactions Analysis except you are using the whole company as an assessment unit, not the purchase of a company.
  • So to use this method you would also look for out similar companies to the one you are valuing and look at their price to earnings, EBITDA, stock price and any other variables you think would be a pointer of the health of a company.

Discounted Cash Flow Analysis

  • This is when you use future cash flow, or what the company will make in the upcoming years, to determine what the company is worth now.
  • To calculate DCF you need to work out what the probable or future cash flow is for a company for the next 10 years.
  • Then work out how much that would be in today’s terms by “discounting” it at the rate that would give a return on investment.
  • Then you add in the terminal value of the company and that will tell you how much the company is worth.
Investment Banking Interview Question #9

Which are the situations in which we do not use a DCF in the valuation?

  • We would not use a DCF in the valuation if the company has unstable or unpredictable cash flow or when debt and working capital serve a fundamentally different role.
  • For example, financial institutions like banks do not re-invest debt and working capital forms a major part of their balance sheets- so here we do not use a DCF for such companies.
Investment Banking Interview Question #10

List the most common multiples used in a valuation

Valuation questions are very common in investment banking interviews.

These are relative valuation techniques given below-

Investment Banking Interview Question #11

Briefly explain leveraged buyout?

One of the technology investment banking interview questions.

  • A leveraged buyout (LBO) is when a company or investor buys another company using mostly borrowed money, loans or even bonds to be able to make the purchase.
  • The assets of the company being acquired are usually used collateral for those loans.
  • Sometimes the ratio of debt to equity in an LBO can be 90-10.
  • Any debt percentage higher than that can lead to bankruptcy.
Investment Banking Interview Question #12

Explain the PEG ratio?

  • This stands for Price/earnings to growth ratio and takes the P/E ratio and then accounts for how fast the EPS for the company will grow.
  • A stock that is growing rapidly will have a higher PEG ratio. A stock that is finely priced will have the same P/E ratio and PEG ratio.
  • So if a company’s P/E ratio is 20 and its PEG ratio is also 20 some might argue that the stock is too expensive if another company with the same EPS has a lower P/E ratio, but that also means that it’s growing faster because the PEG rate is 20.

Investment Banking Interview Question #13

What is the formula for Enterprise Value?

  • The formula for enterprise value is: the market value of equity (MVE) + debt + preferred stock + minority interest – cash.
Investment Banking Interview Question #14

Why do you think the cash is subtracted in the formula for enterprise value?

  • The reason why cash is subtracted is that it is regarded as a non-operating asset and because Equity Value indirectly accounts for it.
Investment Banking Interview Question #15

Why do we consider both enterprise value and equity value?

  • Enterprise value signifies the value of the company that is attributable to all investors, whereas equity value represents the portion available to equity shareholders.
  • We consider both because equity value is the number the public at large sees, while enterprise value represents its true value.
Investment Banking Interview Question #16

What does it signify, if a company has a negative enterprise value?

  • The company could have negative enterprise value when the company has extremely large cash balances or an extremely low market capitalization or both.
  • This could occur in companies that are on the brink of bankruptcy or Financial institutions such as the banks, which have large cash balances.

#4 – Mergers and Acquisitions – Investment Banking Interview Questions

Investment Banking Interview Question #17

Briefly explain the process of a buy-side M&A deal

  • Lots of time is spent completing research on the potential acquisition targets and with the company, you are representing, go through multiple cycles of selection and filtering.
  • Based on the feedback from them narrow down the list and decide which ones are to be further approached.
  • Meetings are conducted to gauge the receptivity of potential seller.
  • Serious discussions with the seller take place which calls for in-depth due diligence and figuring out the offer price.
  • Negotiate the price and other key terms of the purchase agreement.
  • Announce the M&A deal/transaction.
Investment Banking Interview Question #18
Briefly explain accretion and dilution analysis

This one is another technical investment banking interview question.

  • In order to gauge the impact of the acquisition to the acquirer’s earnings per share (EPS) and also compare it with the company’s EPS if the acquisition would have not been executed accretion and dilution analysis is undertaken.
  • In simple words, we could say that in the scenario of the new EPS being higher, the transaction will be called “accretive” while the opposite would be called “dilutive.”
Investment Banking Interview Question #19

Given a situation where a company with a low P/E acquires a company with a high P/E in an all-stock deal, will the deal likely be accretive or dilutive?

  • Other things being equal, in a situation where a company with a low P/E acquires a company with a high P/E, the transaction would be dilutive to the acquirer’s Earnings per Share (EPS).
  • The reason for this is that the acquirer will have to shell out more for each rupee of earnings than the market values its own earnings.
  • Therefore in such a situation the acquirer would have to issue proportionally more shares in the transaction.
Investment Banking Interview Question #20

What are the synergies and its types?

  • Synergies are where the buyer gets more value than out of an acquisition than what the financials would predict. There are basically two types of synergies –
  • Revenue synergy: the combined company can cross-sell products to new customers or up-sell new products to existing customers. Because of the deal, it could be possible to expand in new geographies.
  • Cost synergies: the combined company could amalgamate buildings and administrative staff and can lay off redundant employees. It could also be in a position to close down redundant stores or locations.
Investment Banking Interview Question #21

How does Goodwill get created in an acquisition?

  • Goodwill is an intangible asset that mostly stays the same over years and is not amortized like other intangibles. It only changes when there is an acquisition.
  • Goodwill is basically the valuable assets that are not shown like financial assets on the balance sheet. For example, brand name, customer relationship, intellectual property rights, etc.
  • Goodwill is basically the subtraction of the book value of a company from its equity purchase price. It signifies the value over the “fair market value” of the seller that the buyer has paid.

#5 – Initial Public Offerings (IPO) – Investment Banking Interview Questions

Investment Banking Interview Question #22

Briefly describe what would you do if you are working on an IPO for a client?

  • First of all, we would meet the client and gather all the necessary information such as their financial details, customers and learn about the sector they belong to.
  • After this, you would meet other bankers and lawyers the registration statement which would describe the company’s business and market to its investors.
  • Next, you would receive comments from the SEC and keep revising the document until it is acceptable.
  • Now you would spend the coming weeks in organizing roadshows where you would present the company to the institutional clients and also convince them to invest in them.
  • After raising capital for the clients the company would start trading on the exchange.
Investment Banking Interview Question #23

What are the benefits of a company getting listed on an exchange?

  • It is an important step for a company to achieve liquidity
  • There are certain investors who would want to invest only in exchange-listed issuers
  • It helps the company establish a recognized value for their stock which in turn could also help it use stock for acquisitions rather than cash

#1 – Miscellaneous – Investment Banking Interview Questions

Investment Banking Interview Question #24

What is in a pitch book?

Pitch book depends on the kind of deal the company is pitching for but the common structure would include:

  • Bank credentials to prove their expertise in completing similar deals before.
  • Summary of company’s options
  • Appropriate financial models and valuation
  • Investment Banking Charts
  • Potential acquisition targets or potential buyers
  • Summary and key recommendations
Investment Banking Interview Question #25

Tell me a company you admire/follow and pitch me a stock

You need to structure your answer for such investment banking interview questions keeping in mind the following;

  • Give the name of the stock you have been following and the reason for the same
  • Quickly summarize what the company’s business
  • Provide a quick overview of the financials to indicate its size and how profitable it is. Also if you can provide with specific details on Revenue, EBITDA multiples, or its P/E multiple
  • Provide reasons as to how the stock or their business is more attractive than its rivals.
  • You should speak about the trend the stock has had at least in the past 3-5 years.
  • You could also talk about the future outlook for the company.
Investment Banking Interview Question #26

When buying a company why do private equity firms use leverage?

  • The private equity firm reduces the amount of equity to the deal by using significant amounts of leverage (debt) to help finance the purchase price.
  • By doing this, it will increase the private equity firm’s rate of return substantially when exiting the investment.
Investment Banking Interview Question #27

What is convexity?

  • Convexity is a more accurate measure of the relationship between yield and price changes in bonds in relation to the change in interest rates.
  • Duration calculates this as a straight line, when in actuality it is a convex curve, hence the name.
  • This is used as a risk calculation because it can tell how a bond yield will respond to interest rate changes.
Investment Banking Interview Question #28

Define the risk-adjusted rate of returns

  • When looking at an investment you cannot simply look at the return that is projected. If the profit from investment A is greater than the profit from investment B you may immediately want to go with investment A.
  • But investment A might have a greater chance of a total loss than investment B so even though the profit may be larger, it is a lot riskier and therefore not necessarily a better investment.
  • The adjusted rate of return is when you not only look at the return that an investment may give you, but you also measure the risk of that investment.
  • The adjusted rate of return is usually denoted as a number or rating.
  • If you are technically minded you may also want to mention the ways that risk is measured: beta, alpha, and the Sharpe ratio, r-squared and standard deviation.

Conclusion

The key to successfully answering these technical investment banking interview questions is to apply the concepts you’re learning and test yourself. Hope this has helped you learn some important question and answers on investment banking topics and brings you steps closer to crack the high profile interviews. All the best :-)

P.S. Kindly note we have only touched upon the technical questions and their types, apart from these you would also have to prepare for the personal questions, why investment banking Interview questions and brain teasers which are usually part of testing the candidates.

Investment Banking Interview Questions and Answers Video

In this guide, we list the top 28 most common asked Investment Banking Interview Questions and Answers that you must know. Here we discuss the tips to answer the Investment banking interview questions on accounting, valuations, modeling, Pitchbook, M&A, IPO, Leveraged buyouts and others. You may also have a look at these Q&A to learn more –

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