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TechnicalQuestionsPreparationforFinanceInterviews2008EditionCopyright2008byWallStreetOasis.com.Allrightsreserved.Allinformationinthisguideissubjecttochangewithoutnotice.WallStreetOasis.commakesnoclaimsastotheaccuracyandreliabilityofthisguideandtheinformationcontainedwithin.Nopartofthisguidemaybereproducedortransmittedinanyformorbyanymeans,electronicormechanical,foranypurpose,withouttheexpresswrittenpermissionofWallStreetOasis.com2TableofContentsIntroduction3Accounting,FinanceandValuation4-13Basic4-10Intermediate10-13Advanced13Stocks14-17Basic14Intermediate15-17Advanced17BondsandInterestRates18-23Basic18-19Intermediate19-21Advanced22-23Currencies24-25Basic24Intermediate24-25Advanced25OptionsandDerivatives26-28Basic26-27Intermediate27-28Advanced28MergersandAcquisitions29-32Basic29Intermediate30-31Advanced32Other33Brainteasers34-353TechnicalQuestions:IntroductionTechnicalquestionsarepartofalmosteveryfinanceinterview.Whilethelevelofdifficultyofthesequestionsvaryfromfirmtofirm,andwillchangebasedonacandidatesbackground,allintervieweeswillundoubtedlybequizzedontechnicalquestionsinatleastoneoftherounds.Thisguideisafairlyexhaustivecompilationofthemostcommontechnicalquestionsinfinanceinterviews.Obviously,youwillnotencountereveryquestion,however,theinterviewmayalsocontainvariationsornewquestionsaltogether.Thisguidewascreatedtoprovideaquickreviewforafractionofthepriceofmostfinanceguides.Clearly,themoredetailedandaccurateresponsesyougive,themorelikelyyouwill“wow”yourinterviewer.Thequestionsinthisguidearebrokendownintothefollowingcategories:Accounting/Finance/Valuation,Stocks,Bonds/InterestRates,Currencies,Options/Derivatives,andMergers&Acquisitions.Thesecategoriesarethendividedintobasic,intermediateandadvancedconcepts.Thequestionsyouaremostlikelytobeaskedareindicatedinbold.Obviously,youshouldfocusyourstudiesontherelevantindustrythatyouaretryingtoenter.IfyouarepreparingforaSalesandTradinginterview,youshouldfocusonstocks,bonds/interestrates,currencies,andoptions/derivatives.ForInvestmentBankingpositionsyoushouldhaveageneralbackgroundinallofthosecategories,butyouaremorelikelytoencounterquestionsfromtheAccounting/Finance/ValuationandtheMergersandAcquisitionssection.Thefinalcategoryisthebrainteaserssection.Gettingbrainteaserscandefinitelyrattleyouinaninterview.Insomecases,aninterviewerwillgiveabrainteaseriftheyarenotabigfanofyouortoseehowyoureactunderpressure.Whatismoreimportantthanactuallygettingtheanswertotheteasercorrectisthewayyouthinkthroughtheproblems--theywanttoseehowyourmindworksanalytically.Seetheexamplesformoreinformation.Youwillsoonfindoutthatinterviewsareagame.Yourinterviewerwilllikelypushyoutoseehowfaryoucangountilyoudon’tknowananswer--andthat’sagoodthing.Youcanhavea4.0withadoublemajorinfinanceandeconfromWharton,butyoustillknownothingcomparedtothepersonontheothersideofthetable.Keepthatinmind,andjustprepareforthesequestionstothebestofyourability.Rememberwhenstudyingthesequestions,youcannotprepareforeverythingthatinterviewersmayask.Theywillalwaysbecomingupwithnewquestionsandnewtwistsonolderconceptssoitisimportantthatyoutryandunderstandtheconceptsbehindtheanswers,ratherthanjustmemorizingthem.Ifyoucometoaquestionyoudonotunderstand,trytodosomeresearchanddevelopadeeperunderstanding.Theexplanationsherearekeptintentionallybrief.Youranswerstothesequestionsshouldnottakemorethan30secondstoaminuteformost.Again,itisagametoproveyouhavedoneyourhomework.Answertheirquestionandmoveon.DonottryandB-Syourwaythroughtechnicalquestions.Donotwasteyourinterviewer’stime,butdonotapologize.Askthemiftheycanexplainittoyou.Beconfidentinwhatyouknowanddon’tknow.Youwilllearnonthejobandthatiswhatyouneedtoproveyouhavetheabilitytodo.Ifyougetintoquestionsfromtheadvancedsectionofthisguide,chancesarethatyourintervieweristryingtopushyoutoseehowfartheycantakeyou,andhowyourespondtopressure.Thekeyis...Remaincalm,coolandcollected.Finally,inmostcasesyoucannot“dingyourself”byfailingtoansweratechnicalquestion.However,youcandefinitelyknockyourselfoutofcontentionbyansweringafitorbehavioralquestioninanundesirablemanner.Mostofthetimetrulyconnectingwithyourintervieweronapersonallevelandshowingyouhavethedrive,passionandabilitytolearninthiscrazybusinesscanoutweighamissteponatechnicalquestion(justdon'tstumbletoomuch!)Thefirstbulletsofeachquestionincludethedefinitionsandinformationaboutthequestion.Thefinalbulletinitalicsisanexampleofwhatyoucouldsaytoyourinterviewertoanswerthequestion,followedbybulletstopotentialfollow-upquestions.4Accounting,FinanceandValuationBasicWhatarethethreemainfinancialstatements?•IncomeStatementoRevenues–COGS–Expenses=NetIncome•BalanceSheetoAssets=Liabilities+ShareholderEquity•StatementofCashFlowsoBeginningCash+CFfromOperations+CFfromInvesting+CFfromFinancing=EndingCash•Thethreemainfinancialstatementsaretheincomestatement,thebalancesheet,andthestatementofcashflows.Howarethethreemainfinancialstatementsconnected?•Seeexhibit1foravisual•Therearemanylinksbetweenthethreefinancialstatements.Startingwiththeincomestatement,thelastlineitemisnetincome.Net