Technical Guide to Finance Interviews 1

2018-19
 The Finance Club | Indian Institute of Management Kashipur

Disclaimer
The data contained here in has been collated from various sources including the internal research data
of The Finance Club IIM Kashipur. The questions contained in this document are only indicative and is
meant to provide the necessary information for placement interviews in finance domain. The questions
are non-exhaustive and the reader is advised to exercise caution on depending solely on this document.
All the sources have been cited in the reference page at the end of the document.

No part of this document should be edited/copied/distributed/reproduced without the permission of The

Finance Club IIM Kashipur. Only the authorized members of The Finance Club IIM Kashipur have the
right to add/delete content from this document. Under no circumstances is this document to be shared
with any third party outside the purview of IIM Kashipur by any means, electronic or mechanical, for any
purpose. Any party found not adhering to the above norms would be considered a defaulter and is liable
to face disciplinary action as deemed fit by the Student Council and/or Placement Committee of IIM
Kashipur.

For any clarification on contents of this document you may contact The Finance Club IIM Kashipur.

2
 General Finance Questions

Accounting & Financial Reporting

Financial Analysis

Valuation

Agenda
Corporate Finance

Currency

Investments

Derivatives

Mergers & Acquisitions

Financial Glossary 3
 The Finance Club | Indian Institute of Management Kashipur

General Finance
Questions
Page | 4
 The Finance Club | Indian Institute of Management Kashipur

If you worked in the finance division of a company, how would you decide whether or
not to invest in a project?
In order to decide, you determine the IRR of the project. The IRR is the discount rate, which will return an
NPV of 0 of all cash flows. If the IRR of the project is higher than the current cost of capital for the
project, then you would want to invest in the project.

What is an institutional investor?

An institutional investor is an organization that pools large sums of money and puts that money to use in
other investments. Some examples of institutional investors are investment banks, insurance companies,
retirement funds, pension funds, hedge funds, mutual funds, and multi-family offices. They act as
specialized investors who invest on behalf of their clients.

Page | 5
 The Finance Club | Indian Institute of Management Kashipur

What is a 'Mutual Fund'

A mutual fund is an investment vehicle made up of a pool of moneys collected from many investors for
the purpose of investing in securities such as stocks, bonds, money market instruments and other
assets. Mutual funds are operated by professional money managers, who allocate the fund's investments
and attempt to produce capital gains and/or income for the fund's investors. A mutual fund's portfolio is
structured and maintained to match the investment objectives stated in its prospectus.

Page | 6
 The Finance Club | Indian Institute of Management Kashipur

What is a 'Hedge Fund'

Hedge funds are alternative investments using pooled funds that employ numerous different strategies to
earn active return, or alpha, for their investors. Hedge funds may be aggressively managed or make use
of derivatives and leverage in both domestic and international markets with the goal of generating high
returns (either in an absolute sense or over a specified market benchmark). It is important to note that
hedge funds are generally only accessible to accredited investors as they require less SEC regulations
than other funds. One aspect that has set the hedge fund industry apart is the fact that hedge funds face
less regulation than mutual funds and other investment vehicles.

Page | 7
 The Finance Club | Indian Institute of Management Kashipur

What is Private Equity?

The simplest definition of private equity is that it is equity – that is, shares representing ownership of or
an interest in an entity – that is not publicly listed or traded. A source of investment capital, private equity
actually derives from high net worth individuals and firms that purchase shares of private companies or
acquire control of public companies with plans to take them private, eventually become delisting them
from public stock exchanges. Most of the private equity industry is made up of large institutional
investors, such as pension funds, and large private equity firms funded by a group of accredited
investors. Since the basis of private equity investment is direct investment into a firm, often to gain a
significant level of influence over the firm's operations, quite a large capital outlay is required, which is
why larger funds with deep pockets dominate the industry.

Page | 8
 The Finance Club | Indian Institute of Management Kashipur

What is ‘Venture Capital’

According to the National Venture Capital Association (NVCA), venture capital firms “invest mostly in young, private
companies that have great promise for innovation and growth.” They provide both funding and professional expertise to
these companies. Focus areas for venture capital (VC) firms include software, biotechnology, media and entertainment,
medical devices, wireless communications, Internet, and networking. In the past few years, VC firms have also begun
investing in the clean technology sector (which includes renewable energy, power management, and environmental and
sustainability technologies). Some VC firms invest in traditional fields such as financial services, consumer goods,
manufacturing, health care services, and business services and products. Many venture capital firms are beginning to fund
late-stage start-ups (those about to announce an initial stock offering) to reduce their level of risk. To form a venture fund,
VC firms receive investments from pension funds, foundations, insurance companies, endowments, and wealthy
individuals. (Those who invest in venture capital funds are known as “limited partners.” Venture capitalists manage the
portfolio, and they are referred to as “general partners.”) The companies a VC firm invests in become part of the VC firm’s
portfolio— typically for 7 to 10 years. The VC firm assumes financial risk in exchange for an equity stake in the company.
Firms receive a return on their investment when the company they have funded goes public or is bought by or merged with
another company. Venture capital investing can be risky. The NVCA reports that “40 percent of venture-backed companies
fail, 40 percent return moderate amounts of capital, and only 20 percent or less produce high returns.”

Page | 9
 The Finance Club | Indian Institute of Management Kashipur

What is securitization?
Securitization is when an issuer bundles together a group of assets and creates a new financial
instrument by combining those assets and reselling them in different tiers called tranches. One of the
reasons for the recession has been the mortgage-backed securities market, which is made up of
securitized pools of mortgages.

What is arbitrage?
Arbitrage occurs when an investor buys and sells related assets simultaneously in order to take
advantage of temporary price differences. Because of the technology now employed in the markets, the
only people who can truly take advantage of arbitrage opportunities are traders with sophisticated
software since price inefficiencies often close in a matter of seconds.

Page | 10
 The Finance Club | Indian Institute of Management Kashipur

What is a Mortgage-Backed Security (MBS)?

A mortgage-backed security is a security that pays its holder a periodic payment based on cash flows
from the underlying mortgages that fund the security.

It will pay periodic payments that are very similar to coupon payments from bonds. These cash flows
come from packaged mortgages that have been bought up by a bank.

The MBS market allowed the investment community to lend money to homeowners with banks acting as
the middlemen. An investor paid for an MBS and was paid back over time with homeowners’ mortgage
payments.

Many MBS were rated AAA because they were considered highly diversified; investors did not expect the
housing market to collapse all at once across the entire country. Unfortunately, we learned the hard way
that housing values are highly correlated and the AAA rating of these securities was unfounded.

Page | 11
 The Finance Club | Indian Institute of Management Kashipur

What is a Credit Default Swap (CDS)?

A credit default swap is essentially insurance on a company’s debt. It is a way to insure that an investor
will not be hurt if the company defaults.

Credit Default Swaps are sold over the counter in an unregulated market.

What is a bulge bracket firm?

“Bulge bracket” is a term that loosely translates into the largest full service brokerages/investment banks
as measured by various league table standings. Today, Goldman Sachs, Morgan Stanley, Credit Suisse,
J.P. Morgan, Citigroup, UBS, Deutsche Bank, Barclays Capital, and Merrill Lynch (part of BofA) are
considered part of the bulge bracket.

Page | 12
 The Finance Club | Indian Institute of Management Kashipur

Why are companies like Facebook, Twitter, and Instagram receiving multi-billion
dollar valuations?
With the social media giant Facebook, investors are expecting the company to find a better way to
monetize their massive user base. With over 800 million members, if Facebook can figure out how to
charge more for advertising, their earnings could be astronomical! Another reason a company like
Facebook may be valued in the billions is because companies like Microsoft are willing to pay
astronomical premiums for a small equity stake in order to catch the wave of the future. For example,
when Microsoft invested in 2007, Facebook was valued at $15 billion; at its IPO in 2012, Facebook’s
value was around $100 billion.

Page | 13
 The Finance Club | Indian Institute of Management Kashipur

What is “junk?”
Called “high-yield” bonds by the investment banks (never call it junk yourself), these bonds are below
investment grade, and are generally unsecured debt. Below investment grade means at or below BB (by
Standard & Poor’s) or Ba (by Moody’s).

What is the difference between senior and junior bondholders?

Senior bondholders get paid first (and as a result their bonds pay a lower rate of interest if all else is
equal). The order in which debtors get paid in the case of bankruptcy is generally: commercial debts
(vendors), mortgage lenders, other bank lenders, senior secured bondholders, subordinated (junior)
secured bondholders, debentures (unsecured) holders, preferred stock holders, and finally straight equity
(stockholders.)

Page | 14
 The Finance Club | Indian Institute of Management Kashipur

Accounting & Financial

Reporting
Page | 15
 The Finance Club | Indian Institute of Management Kashipur

What are the three main financial statements?

1. Income Statement

2. Balance Sheet

3. Statement of Cash Flows

The three main financial statements are the Income Statement, the Balance Sheet, and the Statement of
Cash Flows. The Income Statement shows a company’s revenues, costs, and expenses, which together
yield net income. The Balance Sheet shows a company’s assets, liabilities, and equity. The Cash Flow
Statement starts with net income from the Income Statement; then it shows adjustments for non-cash
expenses, non-expense purchases such as capital expenditures, changes in working capital, or debt
repayment and issuance to calculate the company’s ending cash balance.

Page | 16
 The Finance Club | Indian Institute of Management Kashipur

What are the three components of the Statement of Cash Flows?

The three components of the Cash Flows Statement are Cash from Operations, Cash from Investing,
and Cash from Financing.
Cash from Operations – Cash generated or lost through normal operations, sales, and changes in
working capital (more detail on working capital below).
Cash from Investing – Cash generated or spent on investing activities; may include, for example, capital
expenditures (use of cash) or asset sales (source of cash). This section will also show any investments
in the financial markets and operating subsidiaries. Note: This section can explain a large negative cash
flow during the reporting period, which isn’t necessarily a bad thing if it is due a large capital expenditure
in preparation for future growth.
Cash from Financing – Cash generated or spent on financing the business; may include proceeds from
debt or equity issuance (source of cash) or cost of debt or equity repurchase (use of cash).

Page | 17
 The Finance Club | Indian Institute of Management Kashipur

Walk me through the major line items of an Income Statement.

The first line of the Income Statement represents revenues or sales. From that you subtract the cost of
goods sold, which leaves gross margin. Subtracting operating expenses from gross margin gives you
operating income. From operating income you subtract interest expense and any other expenses (or add
other income), such as tax payments or interest earnings, and what’s left is net income.

Income statements: Revenue; Cost of Goods Sold; SG&A (Selling, General & Administrative Expenses);
Operating Income; Income tax, interest.

Page | 18
 The Finance Club | Indian Institute of Management Kashipur

What is the difference between the Income Statement and the Statement of Cash
Flows?
The Income Statement is a record of Revenues and Expenses while the Statement of Cash Flows
records the actual cash that has either come into or left the company.

The Statement of Cash Flows has the following categories: Operating Cash Flows, Investing Cash
Flows, and Financing Cash Flows.

Interestingly, a company can be profitable as shown in the Income Statement, but still go bankrupt if it
doesn’t have the cash flow to meet interest payments.

Page | 19
 The Finance Club | Indian Institute of Management Kashipur

What is the link between the Balance Sheet and the Income Statement?
The main link between the two statements is that profits generated in the Income Statement gets added
to shareholder’s equity on the Balance Sheet as Retained Earnings. Also, debt on the Balance Sheet is
used to calculate interest expense in the Income Statement.

What is the link between the Balance Sheet and the Statement of Cash Flows?
The Statement of Cash Flows starts with the beginning cash balance, which comes from the Balance
Sheet. Also, Cash from Operations is derived using the changes in Balance Sheet accounts (such as
Accounts Payable, Accounts Receivable, etc.). The net increase in cash flow for the prior year goes back
onto the next year’s Balance Sheet.

Page | 20
 The Finance Club | Indian Institute of Management Kashipur

What is EBITDA?

A proxy for cash flow, EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization.
What is net debt?

Net debt is a company’s total debt minus the cash it has on the balance sheet. Net debt assumes that a
company pays off any debt it can with excess cash on the balance sheet.

How could a company have positive EBITDA and still go bankrupt?

Bankruptcy occurs when a company can’t make its interest or debt payments. Since EBITDA is Earnings
BEFORE Interest, if a required interest payment exceeds a company’s EBITDA, then if they have
insufficient cash on hand, they would soon default on their debt and could eventually need bankruptcy
protection.

Page | 21
 The Finance Club | Indian Institute of Management Kashipur

Say you knew a company’s net income. How would you figure out its “free cash
flow”?

Start with the company’s Net Income. Then add back Depreciation and Amortization. Subtract the
company’s Capital Expenditures (called “CapEx” for short, this is how much money the company invests
each year in plant and equipment). The number you get is the company’s free cash flow:

Net Income + Depreciation and Amortization - Capital Expenditures - Increase (or + decrease) in net
working capital = Free Cash Flow (FCF)

Walk me through the major line items on a Cash Flow statement.

First the Beginning Cash Balance, then Cash from Operations, then Cash from Investing Activities, then
Cash from Financing Activities, and finally the Ending Cash Balance.

Page | 22
 The Finance Club | Indian Institute of Management Kashipur

What happens to each of the three primary financial statements when you change a) gross
margin b) capital expenditures c) any other change?

Think about the definitions of the variables that change. For example, gross margin is gross profit/sales, or the
extent to which sales of sold inventory exceeds costs. Hence, if a) gross margin were to decrease, then gross
profit decreases relative to sales. Thus, for the Income Statement, you would probably pay lower taxes, but if
nothing else changed, you would likely have lower net income. The cash flow statement would be affected in the
top line with less cash likely coming in. Hence, if everything else remained the same, you would likely have less
cash. Going to the Balance Sheet, you would not only have less cash, but to balance that effect, you would have
lower shareholder’s equity. b) If capital expenditure were to say, decrease, then first, the level of capital
expenditures would decrease on the Statement of Cash Flows. This would increase the level of cash on the
balance sheet, but decrease the level of property, plant and equipment, so total assets stay the same. On the
income statement, the depreciation expense would be lower in subsequent years, so net income would be
higher, which would increase cash and shareholder’s equity in the future. c) Just be sure you understand the
interplay between the three sheets. Remember that changing one sheet has ramifications on all the other
statements both today and in the future.

Page | 23
 The Finance Club | Indian Institute of Management Kashipur

What is the difference between LIFO and FIFO?

LIFO and FIFO are different methods of dealing with inventory and COGS in a company’s accounting
policy. With LIFO, the last inventory produced or purchased will be the first to be recognized when goods
are sold. With FIFO, the first inventory produced or purchased will be the first recognized when goods
are sold.

What’s the difference between cash-based accounting and accrual accounting?

With cash-based accounting, a company won’t recognize expenses or revenues until the cash is actually
disbursed or collected. With accrual accounting, a company will recognize expenses and revenues when
it has entered into a transaction or agreement that will require it to pay or be paid, even if cash won’t
change hands until sometime in the future. Most companies use accrual accounting since credit cards
are so prevalent.

Page | 24
 The Finance Club | Indian Institute of Management Kashipur

If you could use only one financial statement to evaluate the financial state of a
company, which would you choose?
I would want to see the Cash Flow Statement so I could see the actual liquidity position of the business
and how much cash it is using and generating. The Income Statement can be misleading due to any
number of non-cash expenses that may not truly be affecting the overall business. And the Balance
Sheet alone just shows a snapshot of the Company at one point in time, without showing how operations
are actually performing. But whether a company has a healthy cash balance and generates significant
cash flow indicates whether it is probably financially stable, and this is what the CF Statement would
show.

Page | 25
 The Finance Club | Indian Institute of Management Kashipur

When would a company collect cash from a customer and not show it as revenue? If
it isn’t revenue, what is it?
This typically occurs when a company is paid in advance for future delivery of a good or service, such as
a magazine subscription. If a customer pays for delivery of 12 months of magazines in advance, cash
from that purchase goes onto the Balance Sheet as cash, but also increases deferred revenue, a liability.
As each issue is delivered to the customer over the course of the year, the deferred revenue line item will
go down, reducing the company’s liability, while a portion of the subscription payment will be recorded as
revenue.

Page | 26
 The Finance Club | Indian Institute of Management Kashipur

How would a $10 increase in depreciation expense affect the each of the three
financial statements?
Let’s start with the Income Statement. The $10 increase in depreciation will be an expense and will
reduce net income by $10 times (1–the tax rate). Assuming a 40% tax rate, this will mean a reduction in
net income of 60% or $6. So $6 flows to cash from operations, where net income will be reduced by $6
but depreciation will increase by $10, resulting in an increase of ending cash by $4. Cash then flows onto
the Balance Sheet where it increases by $4, PP&E decreases by $10, and retained earnings decreases
by $6, keeping everything in balance.

Page | 27
 The Finance Club | Indian Institute of Management Kashipur

What could a company do with excess cash on its Balance Sheet?

Although it seems like having a lot of cash on hand might be a good thing, especially in a recession, it
really isn’t, because there is an opportunity cost to holding cash. A company should have enough cash to
protect itself from bankruptcy in a downturn, but any excess cash should be put to work. The company
could pay a dividend to its equity holders or bonuses to employees, although a growing company will
tend to reinvest rather than pay out cash. It can reinvest its cash in plants, equipment, personnel, or
marketing; it can pay off debt, repurchase equity, or buy out a competitor, supplier, or distributor. If
nothing else, that cash can earn a little something invested in CDs until it can be put to better use.

Page | 28
 The Finance Club | Indian Institute of Management Kashipur

What is goodwill and how does it affect net income?

Goodwill is an intangible asset included on a company’s Balance Sheet. Goodwill may include things like
intellectual property rights, brand name, or customer relations. Goodwill is acquired when purchasing a
firm if the acquirer pays more than the book value of its assets. When something occurs to diminish the
value of the intangible assets, goodwill must be “written down” in a process much like that for
depreciation. Goodwill is subtracted as a non-cash expense and therefore reduces net income.

Page | 29
 The Finance Club | Indian Institute of Management Kashipur

Financial Analysis
Page | 30
 The Finance Club | Indian Institute of Management Kashipur

How do you calculate a company’s Days Sales Outstanding?

Average Accounts Receivable/ Sales x 365 days

Note: The average accounts receivable for any period can be approximated by: (Ending accounts
receivable + beginning accounts receivable) ÷ 2

How do you calculate a company’s Current Ratio?

Current assets (cash, accounts receivable, etc) / Current liabilities (accounts payable and other
short-term liabilities)

A high current ratio indicates that a company has enough cash (and assets they can quickly turn into
cash, like accounts receivable) to cover its immediate payment requirements on liabilities.

Page | 31
 The Finance Club | Indian Institute of Management Kashipur

Gotham Energy just released second quarter financial results. Looking at its balance
sheet you calculate that it’s Current Ratio went from 1.5 to 1.2. Does this make you
more or less likely to buy the stock?
Less likely. This means that the company is less able to cover its immediate liabilities with cash on hand
and other current assets than it was last quarter.

What is Inventory Turnover?

Inventory turnover is a ratio showing how many times a company has sold and replaced inventory during
a period. The company can then divide the days in the period by the inventory turnover formula to
calculate the days it takes to sell the inventory on hand. It is calculated as sales divided by average
inventory.

Page | 32
 The Finance Club | Indian Institute of Management Kashipur

Could a company have a negative book Equity Value?

Yes, a company could have a negative book Equity Value if the owners are taking out large cash
dividends or if the company has been operating for a long time at a net loss, both of which reduce
shareholders’ equity.

What is the difference between public Equity Value and book value of equity?
Public Equity Value is the market value of a company’s equity; while the book value is just an accounting
number. A company can have a negative book value of equity if it has been taking large cash dividends,
or running at a net loss; but it can never have a negative public Equity Value, because it cannot have
negative shares or a negative stock price.

Page | 33
 The Finance Club | Indian Institute of Management Kashipur

What is operating leverage?

Operating leverage is the percentage of costs that are fixed versus variable.

A company whose costs are mostly fixed has a high level of operating leverage.

If a company has a high level of operating leverage, it means that much of any increase in revenue will
fall straight to the bottom line in the form of profit, because the incremental cost of producing another unit
is so low.

Operating leverage is the relationship between a company’s fixed and variable costs. A company with
more fixed costs has a higher level of operating leverage

Page | 34
 The Finance Club | Indian Institute of Management Kashipur

What is Return On Equity (ROE)?

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity.
Return on equity measures a corporation's profitability by revealing how much profit a company
generates with the money shareholders have invested.

ROE is expressed as a percentage and calculated as:

Return on Equity (ROE) = Net Income/Shareholder's Equity

Net income is for the full fiscal year (before dividends paid to common stockholders but after dividends to
preferred stock.) Shareholder's equity does not include preferred shares.

Page | 35
 The Finance Club | Indian Institute of Management Kashipur

What is Earnings Per Share (EPS)?

Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of
common stock. Earnings per share serves as an indicator of a company's profitability. EPS is calculated
as:

EPS = (Net Income - Dividends on Preferred Stock) / Average Outstanding Shares

Page | 36
 The Finance Club | Indian Institute of Management Kashipur

Corporate Finance
Page | 37
 The Finance Club | Indian Institute of Management Kashipur

What is the formula for the Capital Asset Pricing Model (CAPM)?

The Capital Asset Pricing Model is used to calculate the expected return on an investment. Beta for a
company is a measure of the relative volatility of the given investment with respect to the market, i.e., if
Beta is 1, the returns on the investment (stock/bond/portfolio) vary identically with the market’s returns.
Here “the market” refers to a well diversified index such as the S&P 500. The formula for CAPM is as
follows:

reL = rf + ßL(rm - rf )
Here:
rf = Risk-free rate = the Treasury bond rate for the period for which the projections are being considered
rm = Market return
rm - rf = Excess market return
ßL = Leveraged Beta
reL = Discount rate for (leveraged) equity (calculated using the CAPM)

Page | 38
 The Finance Club | Indian Institute of Management Kashipur

Describe a typical company's capital structure.

A company's capital structure is just what it sounds like: the structure of the capital that makes up the
firm, or its debts and equity. Capital structure includes permanent, long-term financing of a company,
including long-term debt, preferred stock and common stock, and retained earnings. The statement of a
company's capital structure as expressed above reflects the order in which contributors to the capital
structure are paid back, and the order in which they have claims on company's assets should it liquidate.

Debt has first priority, then preferred stockholders, then common stockholders. Anything left over is put
into the retained earnings account.

What is Beta?
Beta is the value that represents a stock’s volatility with respect to overall market volatility.

Page | 39
 The Finance Club | Indian Institute of Management Kashipur

What is an Initial Public Offering (IPO)?

IPO is the acronym for Initial Public Offering. It is the first time a privately-held company sells shares of
stock to the public market. Usually a company goes public to raise capital for growing the business or to
allow the original owners and investors to cash out some of their investment.

What is a primary market and what is a secondary market?

The primary market is the market where a new stock or bond is sold the first time it comes to market. The
secondary market is where the security will trade after its initial public offering (BSE,NSE, Nasdaq).

Page | 40
 The Finance Club | Indian Institute of Management Kashipur

What is the market risk premium?

The market risk premium is the excess return that investors require for choosing to purchase stocks over
“risk-free” securities. It is calculated as the average return on the market (normally the S&P 500, typically
around 10-12%) minus the risk free rate (current yield on a 10-year Treasury).

How can a company raise its stock price?

Any positive news about the company can potentially raise the stock price. If the company repurchases
stock, it lowers the shares outstanding and raises the EPS, which would raise the stock price. A
repurchase is also seen as a positive signal in the market. A company could announce operational
efficiencies or other cost-cuts, or a change to its organizational structure such as consolidations. It could
announce an accretive merger or acquisition that would increase earnings per share. Any of these
occurrences would most likely raise the company’s stock price.

Page | 41
 The Finance Club | Indian Institute of Management Kashipur

What is correlation?
Correlation is the way that two investments move in relation to one another. If two investments have a
strong positive correlation, they will have a correlation near 1 and when one goes up or down, the other
will do the same. When you have two with a strong negative correlation, they will have a correlation near
-1 and when one investment moves up in value, the other should move down.

What is diversification?
Diversification is creating a portfolio of different types of investments. It means investing in stocks, bonds,
alternative investments, etc. It also means investing across different industries. If investors are properly
diversified, they can essentially eliminate all unsystematic risk from their portfolios, meaning that they
can limit the risk associated with individual stocks so that their portfolios will be affected only by factors
affecting the entire market.

Page | 42
 The Finance Club | Indian Institute of Management Kashipur

Valuation
Page | 43
 The Finance Club | Indian Institute of Management Kashipur

Why might there be multiple valuations for a single company?

There are several different methods by which one can value a company. And even if you use the
rigorously academic DCF analysis, the two main methods (the WACC and APV method) make different
assumptions about interest tax shields, which can lead to different valuations.

Why are the P/E multiples for a company in London different than that of the same
company in the States?
The P/E multiples can be different in the two countries even if all other factors are constant because of
the difference in the way earnings are recorded. Overall market valuations in American markets tend to
be higher than those in the U.K.

Page | 44
 The Finance Club | Indian Institute of Management Kashipur

How do you calculate the terminal value of a company?

Terminal year value is calculated by taking a given year in the future at which a company is stable
(usually year 10), assuming perpetually stable growth after that year, using a perpetuity formula to come
up with the value in that year based on future cash flows, and discounting that value back to the present
day. This method uses the following formula.

T.V. = FCF10 (1 + g)/(rd - g)

Here “g” is an assumed growth rate and rd is the discount rate. Remember that you could also calculate
the terminal value of a company by taking a multiple of terminal year cash flows, and discounting that
back to the present to arrive at an answer. This alternative method might be used in some instances
because it is less dependent on the assumed growth rate (g).

Page | 45
 The Finance Club | Indian Institute of Management Kashipur

How much would you pay for a company with $50 million in revenue and $5 million in
profit?
If this is all the information you are given you can use the comparable transaction or multiples method to
value this company (rather than the DCF method). To use the multiples method, you can examine
common stock information of comparable companies in the same industry, to get average industry
multiples of price-to-earnings. You can then apply that multiple to find the given company’s value.

Page | 46
 The Finance Club | Indian Institute of Management Kashipur

What is the difference between the APV and WACC?

WACC incorporates the effect of tax shields into the discount rate used to calculate the present value of
cash flows. WACC is typically calculated using actual data and numbers from balance sheets for
companies or industries.

APV adds the present value of the financing effects (most commonly, the debt tax shield) to the net
present value assuming an all-equity value, and calculates the adjusted present value. The APV
approach is particularly useful in cases where subsidized costs of financing are more complex, such as
in a leveraged buyout.

Page | 47
 The Finance Club | Indian Institute of Management Kashipur

Name three companies that are undervalued and tell me why you think they are undervalued.

This is a very popular question for equity research and portfolio management jobs. Here you have to do
your homework. Study the stocks you like and value them using various methods: DCF, multiples,
comparable transactions, etc. Then choose several undervalued (and overvalued) stocks, and be
prepared to back up your assessment, using financial and strategy information.

For example, let’s say that Coke received some bad PR recently and its stock took a hammering in the
market. However, the earnings of Coke are not expected to decrease significantly because of the
negative publicity (or at least that’s your analysis). Thus, Coke is trading at a lower P/E relative to Pepsi
and others in the industry: it is undervalued. This is an example of a line of reasoning you might offer
when asked this question (the more thorough and insightful the reasoning, the better).

Also, keep in mind that there are no absolute right answers for a question like this: If everyone in the
market believed that a stock was undervalued, the price would go up and it wouldn’t be undervalued
anymore! What the interviewer is looking for is your chain of thought, your ability to communicate that
convincingly, your interest in the markets and your preparation for the interview.

Page | 48
 The Finance Club | Indian Institute of Management Kashipur

What are some ways you can value a company?

The simplest is probably market valuation, which is just the public Equity Value of a company based on
the public markets. To get the Enterprise Value, you add the net debt on its books, preferred stock, and
any minority interest. A few other ways to value a company include comparable company analysis,
precedent transactions, discounted cash flow, leveraged buyout valuation, and liquidation valuation.

Is 10 a high P/E ratio?

The answer to this or any question like this is, “it depends.” P/E ratios are relative measurements, and in
order to know whether a P/E ratio is high or low, we need to know the general P/E ratios of comparable
companies. Generally, higher growth firms will have higher P/E ratios because their earnings will be low
relative to their price, with the idea that the earnings will eventually grow more rapidly that the stock's
price.

Page | 49
 The Finance Club | Indian Institute of Management Kashipur

What are the different multiples that can be used to value a company?
The most commonly used multiple is price-to-earnings multiple, or “P/E ratio.” Other multiples that are
used include revenue, EBITDA, EBIT, and book value. The relevant multiple depends on the industry.
For example, Internet companies are often valued with revenue multiples; this explains why companies
with low profits can have such high market caps.

Companies in the metals and mining industry are valued using EBITDA. Not only should you be aware of
the financial metric being used, you should know the time period the metric used represents: for
example, earnings in a P/E ratio can be for the previous or projected 12 months, or for the previous or
projected fiscal year.

Page | 50
 The Finance Club | Indian Institute of Management Kashipur

How do you value a private company?

You can value a private company with the same techniques you would use for a public company but with
a few differences that make it more difficult. Financial information will likely be harder to find and
potentially less complete and less reliable. Second, you can’t use a straight market valuation for a
company that isn’t publicly traded. In addition, a DCF can be problematic because a private company
won’t have an equity beta to use in the WACC calculation. Finally, if you’re doing a comps analysis using
publicly traded companies, a 10-15% discount may be required as a 10-15% premium is paid for the
public company’s relative liquidity.

Page | 51
 The Finance Club | Indian Institute of Management Kashipur

Walk me through a Discounted Cash Flow model.

First, project the company’s free cash flows for about 5 years using the standard formula.( Free cash flow
is EBIT times 1 minus the tax rate, plus Depreciation and Amortization, minus Capital Expenditures,
minus the Change in Net Working Capital.) Next, predict free cash flows beyond 5 years using either a
terminal value multiple or the perpetuity method. To calculate the perpetuity, establish a terminal growth
rate, usually about the rate of inflation or GDP growth, a low single-digit percentage. Now multiply the
Year 5 cash flow by 1 plus the growth rate and divide that by your discount rate minus the growth rate.
Your discount rate is the Weighted Average Cost of Capital, or WACC. Use that rate to discount all your
cash flows back to year zero. The sum of the present values of all those cash flows is the estimated
present Enterprise Value of the firm according to a discounted cash flow model.

Page | 52
 The Finance Club | Indian Institute of Management Kashipur

What is WACC and how do you calculate it

WACC is the acronym for Weighted Average Cost of Capital. It is used as the discount rate in a
discounted cash flow analysis to calculate the present value of a company’s cash flows and terminal
value. It reflects the overall cost of a company’s raising new capital, which is also a representation of the
riskiness of investing in the company. Mathematically, WACC is the percentage of equity in the capital
structure times the cost of equity (calculated by the Capital Assets Pricing Model) plus percentage of
debt in the capital structure times one minus the corporate tax rate times the cost of debt—current yield
on outstanding debt—plus percentage of preferred stock in the capital structure times the cost of
preferred stock if there is any preferred stock outstanding.

Page | 53
The Finance Club | Indian Institute of Management Kashipur

Page | 54
 The Finance Club | Indian Institute of Management Kashipur

Why do you project out free cash flows for the DCF model?
The reason you project FCF for the DCF is because FCF is the amount of actual cash that could
hypothetically be paid out to debt holders and equity holders from the earnings of a company.

When would you not want to use a DCF?

If you have a company that has very unpredictable cash flows, then attempting to project those cash
flows and create a DCF model would not be effective or accurate. In this situation you will most likely
want to use a multiples or precedent transactions analysis.

Page | 55
 The Finance Club | Indian Institute of Management Kashipur

How would you value a company with no revenue?

In order to value a company with no revenue, such as a start up, you must project the company’s cash
flows for future years and then construct a discounted cash flow model of those cash flows using an
appropriate discount rate. Alternatively, you could use other operating metrics to value the company as
well. If you took a start-up website with 50,000 subscribers, but no revenue, you could look at a similar
website’s value per subscriber and apply that multiple to the website you are valuing.

What would be the effect of using levered free cash flow rather than unlevered free
cash flow in your DCF model?
If you were to use the levered free cash flow in your DCF, you would end up with the Equity Value of the
company rather than the Enterprise Value since the cash flows you are finding the present value for are
after the debt investors had been repaid, therefore indicating how much cash would be available to
equity investors, not to all investors.

Page | 56
 The Finance Club | Indian Institute of Management Kashipur

How do you go from the Enterprise Value you would calculate using a DCF to a per
share price for a public company?
Once you come up with your Enterprise Value, you add cash and then subtract debt, preferred stock,
and minority interest to come up with an Equity Value. Once you have the Equity Value, you must use
Excel to calculate a per share price based on the number of fully diluted shares outstanding. However,
the number of fully diluted shares will depend on the share price, so you will have to use the iterations
function in Excel in order calculate this

Page | 57
 The Finance Club | Indian Institute of Management Kashipur

Investments
Stocks & Portfolio Management
Page | 58
 The Finance Club | Indian Institute of Management Kashipur

When should a company issue stock rather than debt to fund its operations?
There are several reasons for a company to issue stock rather than debt. If the company believes its
stock price is inflated it can raise money (on very good terms) by issuing stock. Second, if the projects for
which the money is being raised may not generate predictable cash flows in the immediate future, it may
issue stock.

A simple example of this is a startup company. The owners of startups generally will issue stock rather
than take on debt because their ventures will probably not generate predictable cash flows, which is
needed to make regular debt payments, and also so that the risk of the venture is diffused among the
company’s shareholders.

A third reason for a company to raise money by selling equity is if it wants to change its debt-to-equity
ratio. This ratio in part determines a company’s bond rating. If a company’s bond rating is poor because it
is struggling with large debts, the company may decide to issue equity to pay down the debt.

Page | 59
 The Finance Club | Indian Institute of Management Kashipur

What kind of stocks would you issue for a startup?

A startup typically has more risk than a well-established firm. The kind of stocks that one would issue for
a startup would be those that protect the downside of equity holders while giving them upside. Hence the
stock issued may be a combination of common stock, preferred stock and debt notes with warrants
(options to buy stock).

Is the dividend paid on common stock taxable to shareholders? Preferred stock? Is it

tax deductible for the company?
The dividend paid on common stock is taxable on two levels in the U.S. First, it is taxed at the firm level,
as a dividend comes out from the net income after taxes (i.e., the money has been taxed once already).
The shareholders are then taxed for the dividend as ordinary income (O.I.) on their personal income tax.
Dividend for preferred stock is treated as an interest expense and is tax-free at the corporate level.

Page | 60
 The Finance Club | Indian Institute of Management Kashipur

When should a company buy back stock?

When it believes the stock is undervalued, has extra cash, and believes it can make money by investing
in itself. This can happen in a variety of situations. For example, if a company has suffered some
decreased earnings because of an inherently cyclical industry (such as the semiconductor industry), and
believes its stock price is unjustifiably low, it will buy back its own stock. On other occasions, a company
will buy back its stock if investors are driving down the price precipitously. In this situation, the company
is attempting to send a signal to the market that it is optimistic that its falling stock price is not justified.
It’s saying: “We know more than anyone else about our company. We are buying our stock back. Do you
really think our stock price should be this low?”

Page | 61
 The Finance Club | Indian Institute of Management Kashipur

Why would an investor buy preferred stock?

1. An investor that wants the upside potential of equity but wants to minimize risk would buy preferred
stock. The investor would receive steady interest-like payments (dividends) from the preferred
stock that are more assured than the dividends from common stock.
2. The preferred stock owner gets a superior right to the company’s assets should the company go
bankrupt.
3. A corporation would invest in preferred stock because the dividends on preferred stock are taxed at
a lower rate than the interest rates on bonds.

Page | 62
 The Finance Club | Indian Institute of Management Kashipur

Why would a company distribute its earnings through dividends to common

stockholders?
Regular dividend payments are signals that a company is healthy and profitable. Also, issuing dividends
can attract investors (shareholders). Finally, a company may distribute earnings to shareholders if it lacks
profitable investment opportunities.

What stocks do you like?

This is a question often asked of those applying for all equity (sales & trading, research, etc.) positions.
(Applicants for investment banking and trading positions, as well as investment management positions,
have also reported receiving this question.) If you’re interviewing for one of these positions, you should
prepare to talk about a couple of stocks you believe are good buys and some that you don’t. This is also
a question asked of undergraduate finance candidates to gauge their level of interest in finance.

Page | 63
 The Finance Club | Indian Institute of Management Kashipur

Why did the stock price of XYZ company decrease yesterday when it announced
increased quarterly earnings?
A couple of possible explanations:

1. the entire market was down, (or the sector to which XYZ belongs was down), or
2. even though XYZ announced increased earnings, the Street was expecting earnings to increase
even more

What is your investing strategy?

Different investors have different strategies. Some look for undervalued stocks, others for stocks with
growth potential and yet others for stocks with steady performance. A strategy could also be focused on
the long-term or short-term, and be more risky or less risky. Whatever your investing strategy is, you
should be able to articulate these attributes.

Page | 64
 The Finance Club | Indian Institute of Management Kashipur

If you read that a given mutual fund has achieved 50 percent returns last year, would
you invest in it?
You should look for more information, as past performance is not necessarily an indicator of future
results. How has the overall market done? How did it do in the years before? Why did it give 50 percent
returns last year? Can that strategy be expected to work continuously over the next five to 10 years? You
need to look for answers to these questions before making a decision.

How has your portfolio performed in the last five years?

If you are applying for an investment management firm as an MBA, you’d better have a good answer for
this one. If you don’t have a portfolio, start a mock one using Yahoo! Finance or other tools. Also, if you
think you are going to say it has outperformed the S&P each year, you better be well prepared to explain
why you think this happened.

Page | 65
 The Finance Club | Indian Institute of Management Kashipur

You are on the board of directors of a company and own a significant chunk of the
company. The CEO, in his annual presentation, states that the company’s stock is
doing well, as it has gone up 20 percent in the last 12 months. Is the company’s
stock in fact doing well?
Another trick stock question that you should not answer too quickly. First, ask what the Beta of the
company is. (Remember, the Beta represents the volatility of the stock with respect to the market.) If the
Beta is 1 and the market (i.e. the Dow Jones Industrial Average) has gone up 35 percent, the company
actually has not done too well compared to the broader market.

Page | 66
 The Finance Club | Indian Institute of Management Kashipur

Which industries are you interested in? What are the multiples that you use for those
industries?
As discussed, different industries use different multiples. Answering the first part of the question, pick an
industry and know any major events that are happening. Next, if you claim interest in a certain industry,
you better know how companies in the industry are commonly valued. (Don’t answer the first question
without knowing the answer to the second!)

What did the S&P BSE SENSEX close at yesterday?

Be well versed be the closing and opening of the major indices such as the BSE30 and NIFTY50.

Page | 67
 The Finance Club | Indian Institute of Management Kashipur

What does it mean to short a stock?

Short selling a stock is the opposite of going long in a stock. Usually an investor buys a stock believing it
will sell for a higher price in the future. When short-selling, investors stock they don’t actually own, in the
belief that they will be able to purchase it for a lower price in the future.

What is liquidity?
Liquidity is how easily an asset can be bought and sold by an investor. Some examples of liquid assets
include money market accounts and large-cap stocks. Some non-liquid assets include many micro-cap
stocks, or a large, specialized factory or production plant that could take years to convert into cash.

Page | 68
 The Finance Club | Indian Institute of Management Kashipur

Which do you think has higher growth potential, a stock that is currently trading at $2
or a stock that is trading at $60?
This question tests your fundamental understanding of a stock’s value. The short answer to the question
is, “It depends.” While at first glance it may appear that the stock with the lower price has more room for
growth, price does not tell the entire picture. Suppose the $2 stock has 1 billion shares outstanding. That
means it has $2 billion market cap, hardly a small cap stock. On the flip side, if the $60 stock has 20,000
shares gives it a market cap of $1,200,000, and hence it is extremely small and is probably seen as
having higher growth potential. Generally, high growth potential has little to do with a stock's price, and
has more to do with it's operations and revenue prospects.

Page | 69
 The Finance Club | Indian Institute of Management Kashipur

Why do some stocks rise so much on the first day of trading after their IPO and
others don’t? How is that money left on the table?
By “money left on the table,” bankers mean that the company could have successfully completed the
offering at a higher price, and that the difference in valuation thus goes to initial investors rather than the
company. Why this happens is not easy to predict from responses received from investors during
roadshows. Moreover, if the stock rises a lot the first day it is good publicity for the firm. But in many
ways it is money left on the table because the company could have sold the same stock in its initial
public offering at a higher price. However, bankers must honestly value a company and its stock over the
long-term, rather than simply trying to guess what the market will do. Even if a stock trades up
significantly initially, a banker looking at the long-term would expect the stock to come down, as long as
the market eventually correctly values it.

Page | 70
 The Finance Club | Indian Institute of Management Kashipur

What is insider trading and why is it illegal?

Undergraduates may get this question as feelers of their general knowledgeof the finance industry.
Insider trading describes the illegal activity of buying or selling stock based on information that is not
public information. The law against insider trading exists to prevent those with privileged information
(company execs, I-bankers and lawyers) from using this information to make a tremendous amount of
money unfairly.

Who is a more senior creditor, a bondholder or stockholder?

The bondholder is always more senior. Stockholders (including those who own preferred stock) must
wait until bondholders are paid during a bankruptcy before claiming company assets.

Page | 71
 The Finance Club | Indian Institute of Management Kashipur

What is the difference between technical analysis and fundamental analysis?

Technical analysis is the process of picking stocks based on historical trends and stock movements.
Fundamental analysis is examining a company’s fundamentals, financial statements, industry, etc., and
then picking stocks that are “undervalued.”

When should a company buy back stock?

A company should buy back its own stock if it believes the stock is undervalued, when it has extra cash,
if it believes it can make money by investing in itself, or if it wants to increase its stock price by increasing
its EPS by reducing shares outstanding or sending a positive signal to the market.

Page | 72
 The Finance Club | Indian Institute of Management Kashipur

Investments
Fixed Income Securities
Page | 73
 The Finance Club | Indian Institute of Management Kashipur

What is the default premium?

The default premium is the difference between the yield on a corporate bond and the yield on a
government bond with the same time to maturity to compensate the investor for the default risk of the
corporation, compared with the “risk-free” comparable government security.

What is the default risk?

The default risk is the risk of a given company not being able to make its interest payments or pay back
the principal amount of their debt. All else equal, the higher a company’s default risk, the higher the
interest rate a lender will require it to pay.

Page | 74
 The Finance Club | Indian Institute of Management Kashipur

What is “face value”?

Face value or par value of a bond is the amount the bond issuer must pay back at the time of maturity.
Bonds are usually issued with a $1,000 face value.

What is the difference between an investment grade bond and a “junk bond”?
An investment grade bond is a bond issued by a company that has a relatively low risk of bankruptcy and
therefore has a low interest payment. A “junk bond” is one issued by a company that has a high risk of
bankruptcy but is paying high interest payments.

Page | 75
 The Finance Club | Indian Institute of Management Kashipur

What is the difference between a corporate bond and a consumer loan?

The main difference between a corporate bond and a consumer loan is the market that it is traded on. A
bond issuance is usually for a larger amount of capital, is sold in the public market and can be traded. A
loan is issued by a bank, and is not traded on a public market.

What is the relationship between a bond's price and its yield?

They are inversely related. That is, if a bond's price rises, it's yield falls, and vice versa. Simply put,

Current yield = interest paid annually / market price * 100 %

Page | 76
 The Finance Club | Indian Institute of Management Kashipur

What are bond ratings?

A bond rating is a grade given to a bond based on its risk of defaulting. This rating is issued by an
independent firm and updated over the life of the bond. The most trusted rating agencies are S&P,
Moody, and Fitch, and their ratings range from AAA to C or even D. The top rating of AAA goes to highly
rated “investment grade” bonds with a low default risk; the C rated bond is “non-investment grade” or
“junk,” and a rating of D means the bond is already in default and not making payments.

How are bonds priced?

Bonds are priced based on the net present value of all future cash flows expected from the bond.

Page | 77
 The Finance Club | Indian Institute of Management Kashipur

How would you value a perpetual bond that pays you $1,000 a year in coupon?
Divide the coupon by the current interest rate. For example, a corporate bond with an interest rate of 10
percent that pays $1,000 a year in coupons forever would be worth $10,000.

If you believe interest rates will fall, which should you buy: a 10-year coupon bond or
a 10-year zero coupon bond?
The 10-year zero coupon bond. A zero coupon bond is more sensitive to changes in interest rates than
an equivalent coupon bond, so its price will increase more if interest rates fall.

If you believe interest rates will fall, should you buy bonds or sell bonds?
Since bond prices rise when interest rates fall, you should buy bonds.

Page | 78
 The Finance Club | Indian Institute of Management Kashipur

When should a company issue debt instead of issuing equity?

First, a company needs a steady cash flow before it can consider issuing debt (otherwise, it can quickly
fall behind interest payments and eventually see its assets seized). Once a company can issue debt, it
should almost always prefer issuing debt to issuing equity.
Generally, if the expected return on equity is higher than the expected return on debt, a company will
issue debt. For example, say a company believes that projects completed with the $1 million raised
through either an equity or debt offering will increase its market value from $4 million to $10 million. It
also knows that the same amount could be raised by issuing a $1 million bond that requires $300,000 in
interest payments over its life. If the company issues equity, it will have to sell 20 percent of the
company, or $1 million/$5 million ($5 million is the new value of the company after the capital infusion).
This would then grow to 20 percent of $10 million, or $2 million. Thus, issuing the equity will cost the
company $1 million ($2 million - $1 million). The debt, on the other hand, will only cost $300,000.
The company will therefore choose to issue debt in this case, as the debt is cheaper than the equity.
Also, interest payments on bonds are tax deductible. A company may also wish to issue debt if it has
taxable income and can benefit from tax shields. Finally, issuing debt sends a quieter message to the
market regarding a company’s cash situation.

Page | 79
 The Finance Club | Indian Institute of Management Kashipur

Which is riskier: a 30-year coupon bond or a 30-year zero coupon bond?

A30-year zero coupon bond. Here’s why: A coupon bond pays interest semi annually, then pays the
principal when the bond matures (after 30 years, in this case). A zero coupon bond pays no interest, but
pays one lump sum upon maturity (after 30 years, in this case). The coupon bond is less risky because
you receive some of your money back before over time, whereas with a zero coupon bond you must wait
30 years to receive any money back.

(Another answer: The zero coupon bond is more risky because its price is more sensitive to changes in
interest rates.)

Page | 80
 The Finance Club | Indian Institute of Management Kashipur

How many basis points equal .5 percent?

Bond yields are measured in basis points, which are 1/100 of 1 percent. 1 percent = 100 basis points.
Therefore, .5 percent = 50 basis points.

Why can inflation hurt creditors?

Think of it this way: If you are a creditor lending out money at a fixed rate, inflation cuts into the
percentage that you are actually making. If you lend out money at 7 percent a year, and inflation is 5
percent, you are only really clearing 2 percent.

If the stock market falls, what would you expect to happen to bond prices, and
interest rates?
You would expect that bond prices would increase and interest rates would fall.

Page | 81
 The Finance Club | Indian Institute of Management Kashipur

What does the government do when there is a fear of hyperinflation?

The government has fiscal and monetary policies it can use in order to control hyperinflation. The fiscal
policies include the use of taxation and government spending to regulate the aggregate level of
economic activity. Increasing taxes and decreasing government spending slows down growth in the
economy and fights inflation.

How would you value a perpetual zero coupon bond?

The value will be zero. A zero coupon doesn’t pay any coupons, and if that continues on perpetually,
when do you get paid? Never – so it ain’t worth nothing!

Page | 82
 The Finance Club | Indian Institute of Management Kashipur

If the stock market falls, what would you expect to happen to bond prices, and
interest rates?
You would expect that bond prices would increase and interest rates would fall.

What is a bond's “Yield to Maturity"?

A bond's yield to maturity is the yield that would be realized through coupon and principal payments if the
bond were to be held to the maturity date. If the yield is greater than the current yield (the coupon/price),
it is said to be selling at a discount. If the yield is less than the current yield, it is said to be selling at a
premium.

Page | 83
 The Finance Club | Indian Institute of Management Kashipur

What is a callable bond?

A callable bond allows the issuer of the bond to redeem the bond prior to its maturity date, thus ending
coupon payments. However, a premium is usually paid by the issuer to redeem the bond early.

What is a put bond?

A put bond is essentially the opposite of a callable bond. A put bond gives the owner of bond the right to
force the issuer to buy back the security (usually at face value) prior to maturity.

What is a floating interest rate?

Floating rate interest is typically seen on bank loans when a bank makes a loan to a company at a rate
that will move with interest rates. The loan’s rate typically is LIBOR plus a certain spread based on the
default risk of the borrower.

Page | 84
 The Finance Club | Indian Institute of Management Kashipur

What is Duration?
Duration is a measure of the sensitivity of the price of a bond to a change in interest rates. Duration is
expressed as a number of years. When interest rates rise, bond prices fall, and falling interest rates
mean rising bond prices. Formally, duration is the "weighted average maturity of cash flows". In simple
terms, it is the price sensitivity to changes in interest rates. If cash flows occur faster or sooner, duration
is lower and vice versa. In other words, a 4 year bond with semi-annual coupons will have a lower
duration than a 10 year zero-coupon bond. The larger the duration number, the greater the impact of
interest-rate fluctuations on bond prices.

Page | 85
 The Finance Club | Indian Institute of Management Kashipur

Currency
Page | 86
 The Finance Club | Indian Institute of Management Kashipur

What is the spot exchange rate?

The spot exchange rate is the rate of a foreign-exchange contract for immediate delivery. Spot rates are
the price a buyer will pay “on the spot” for a foreign currency.

What is the forward exchange rate?

The forward exchange rate is what a foreign currency is agreed to be worth at some time in the future. A
company can enter into a forward contract on exchange rates to help hedge against exchange rate
fluctuations.

Page | 87
 The Finance Club | Indian Institute of Management Kashipur

What factors affect foreign exchange rates?

● Differences in interest rates
● Differences in inflation
● Budget deficits
● Public debt
● Trade policies
● Capital market equilibrium

What is the difference between a “strong” and a “weak” currency?

A strong currency is one with a rising value relative to other currencies. A weak currency is one with a
falling value relative to other currencies.

Page | 88
 The Finance Club | Indian Institute of Management Kashipur

What are some ways the market exchange rate between two country’s currencies is
determined?
The exchange rate between two countries’ currencies is determined by a few factors. One is the interest
rates in the two countries. If the interest rate in the home country increases relative to that in the foreign
country, demand for the home country’s currency tends to increase because investors can get higher
rates of return, and increased demand strengthens the home currency. Another factor affecting
exchange rates is expectations about inflation in the two countries If one country is expected to
experience relatively high inflation, the inflating currency will become less valuable in the long run, all
else equal.

Page | 89
 The Finance Club | Indian Institute of Management Kashipur

Derivatives
Futures, options, forwards, swaps
Page | 90
 The Finance Club | Indian Institute of Management Kashipur

What is a derivative?
A derivative is a type of investment that derives its value from the value of other assets like stocks,
bonds, commodity price, or market index values. Some derivatives are futures contracts, forward
contracts, calls, puts, etc.

What are options?

Options are derivatives that give the bearer the “option” to buy or sell a security at a given date but
without the obligation to do so. The buyer of the option pays an amount less than the actual value of the
stock and has the OPTION to buy or sell the stock for a fixed price on or before a specified date.

Page | 91
 The Finance Club | Indian Institute of Management Kashipur

What are forward contracts?

A forward contract is a type of derivative that arranges for the future delivery of an asset (oil, grain,
currencies, etc) on a specific date at an agreed price.

What are futures contracts?

Futures are a financial contract obligating the buyer to purchase an asset such as a commodity or
another financial instrument at a specified price on a specified date. Futures have very strictly defined
terms and are traded publicly on the exchanges.

Page | 92
 The Finance Club | Indian Institute of Management Kashipur

What is the main difference between futures contracts and forward contracts?
Futures are highly standardized in all their terms so as to be traded publicly on the exchanges. Forwards
are privately negotiated, customizable contracts that can be revised to suit the buyer and seller, which is
why they must be traded over the counter

What are swaps?

A swap is an agreement to exchange future cash flows for a set period. The best known recent “swap”
has been the credit default swaps issued by banks as a kind of insurance against companies not being
able to repay their debt.

Page | 93
 The Finance Club | Indian Institute of Management Kashipur

What is hedging?
Hedging is a financial strategy designed to reduce risk by balancing a position in the market. For
example, an investor that owns a stock could hedge the risk of the stock going down by buying put
options on that security or on related businesses in the same industry.

If an option is “in the money” what does that mean?

When an investor exercises an option that is “in the money,” the difference between the exercise price
and the market price will create value. A call option is in the money if the exercise price is below the
market price and a put option is in the money when its exercise price when it is above the market price.

Page | 94
 The Finance Club | Indian Institute of Management Kashipur

All else being equal, which would be less valuable: a December put option on a small
cap tech stock or a December put option on a large cap healthcare stock?
The put option on the healthcare stock would usually be less valuable because the healthcare industry
and large cap stocks in general are usually less volatile than small cap tech stocks. The more volatile the
underlying asset, the more valuable the option on the stock.

All else being equal, which would be more valuable: a December call option for Apple
or a January call option for Apple?
The January option would be more valuable because the later an option expires, the more valuable it is.

Page | 95
 The Finance Club | Indian Institute of Management Kashipur

Why do interest rates matter when figuring the price of options?

Interest rates matter due to net present value. A higher interest rate lowers an option’s value because the
PV of that option will be lower.

What is Alpha?
Alpha is the risk-adjusted performance of an investment. It represents the return in excess of the return
expected for the risk of the investment.

Page | 96
 The Finance Club | Indian Institute of Management Kashipur

What would you expect to have a higher beta: a small-cap technology company or a
large-cap manufacturer?
A small cap technology company is expected to be a riskier investment than a large manufacturing
company. Therefore, all else equal, the technology company should have a higher beta.

What is Delta?
Delta is the relationship between the price of an option/derivative and the price of the underlying security.

If a call option has a Delta of 0.5, then if the price of the stock rises by $1.00, the price of the option will
rise by $0.50.

Page | 97
 The Finance Club | Indian Institute of Management Kashipur

What is Gamma?
Gamma is the first derivative of Delta and is used to gauge the price of an option relative to how far in or
out of the money it is.

When an option is well in or well out of the money, Gamma is very large; but when the option is on the
verge of being in or out of the money, Gamma is very small.

What is Rho?
Rho measures the sensitivity of a derivative’s price in relation to fluctuations in the risk-free interest rate.

If a derivative has a Rho of 10, every one-point rise in interest rates will be accompanied by a 10% rise in
the price of the derivative.

Page | 98
 The Finance Club | Indian Institute of Management Kashipur

What is Theta?
Theta measures how quickly a derivative’s price will decline with the passage of time, as the instrument
approaches its exercise date (Time Decay).

All else equal, the shorter the time to expiration of a derivative, the lower the option’s value.

What is Vega?
Vega is a measure of how much a derivative’s price will move with a 1% change in volatility of the
market.

A more volatile market makes derivatives more valuable, therefore if Vega is high, the instrument’s value
will increase significantly as the market becomes more volatile.

Page | 99
 The Finance Club | Indian Institute of Management Kashipur

When would a trader seeking profit from a long-term possession of a future be in the
long position?
The trader in the long position is committed to buying a commodity on a delivery date. She would hold
this position if she believes the commodity price will increase.

When would you buy a put option on General Mills stock?

Because buying a put option gives you the option to sell the stock at a certain price, you would do this if
you expect the price of General Mills stock to fall.

Page | 100
 The Finance Club | Indian Institute of Management Kashipur

If the strike price on a put option is below the current price, is the option holder at
the money, in the money or out of the money?
Because a put option gives the holder the right to sell a security at a certain price, the fact that the strike
(or exercise) price is below the current price would mean that the option holder would lose money.
Translate that knowledge into option lingo, and you know that the option holder is out of the money.

Page | 101
 The Finance Club | Indian Institute of Management Kashipur

Mergers &
Acquisitions
Page | 102
 The Finance Club | Indian Institute of Management Kashipur

What are some reasons that two companies would want to merge?
The main reason two companies would want to merge would be the synergies the companies should
create by combining their operations. However, some other reasons include gaining a new market
presence, an effort to consolidate their operations, gaining brand recognition, growing in size, or gaining
the rights to some property (physical or intellectual) that they couldn’t gain as quickly by creating or
building it on their own.

What are some reasons two companies would not want to merge?
Often the synergies that a company hopes to gain by going through with a merger don’t materialize.
Additionally, a company may also be enticed to do a merger due to management ego and/or wanting to
gain media attention. Finally, the investment banking fees associated with completing a merger can be
prohibitive.

Page | 103
 The Finance Club | Indian Institute of Management Kashipur

What are synergies?

The concept of synergies is that the combination of two companies results in a company that is more
valuable than the sum of the values of the two individual companies coming together. The reasons for
synergies can be either cost-saving synergies like cutting employees, reduction in office size, etc or it
can include revenue generating synergies such as higher prices and economies of scale.

What is the difference between a strategic buyer and a financial buyer?

Strategic buyers and financial buyers are very different. A strategic buyer is usually a company looking to
buy another company in order to enhance the business strategically, through cost cutting, synergies,
gaining property, etc. A financial buyer is traditionally a group of investors, such as a private equity firm,
buying a company purely as an investment, looking to generate a return for their investors and carry for
the fund.

Page | 104
 The Finance Club | Indian Institute of Management Kashipur

What is a stock swap?

A stock swap is when a company purchases another company by issuing new stock of the combined
company to the former owners of the company being acquired, rather than paying in cash.

What is the difference between shares outstanding and fully diluted shares?
Shares outstanding represent the actual number of shares of common stock that have been issued as of
the current date. Fully diluted shares are the number of shares that would be outstanding if all “in the
money” options were exercised.

Page | 105
 The Finance Club | Indian Institute of Management Kashipur

What is a cash offer?

A cash offer is payment in cash for ownership of a corporation.

What is a tender offer?

A tender offer is often a hostile takeover technique. It occurs when a company or individual offers to
purchase the stock of the target company for a price usually higher than the current market price in an
attempt to take control of the company without management approval.

Page | 106
 The Finance Club | Indian Institute of Management Kashipur

Describe a recent M&A transaction you have read about.

This is similar to the recent IPO question. It is simply to explore your general interest in the markets.
Look in The Economic times, Business Line or Bloomberg terminal to get information about recent M&A
transactions. Know the companies involved, the price and multiples paid, whether it was a merger or an
acquisition, and the banks working on the deal. Also know the primary reasons behind the M&A
transaction. Before the interview, review this data.

Page | 107
 The Finance Club | Indian Institute of Management Kashipur

What is the treasury stock method?

The treasury stock method is a way of calculating a hypothetical number of shares outstanding based on
current options and warrants that are currently “in the money.” The methodology involves adding the
number of “in the money” options and warrants to the number of common shares currently outstanding,
and then assuming all the proceeds from exercising the options will go towards repurchasing stock at the
current price.

Are most mergers stock swaps or cash transactions and why?

This varies. In strong markets many mergers are stock swaps mainly because the prices of company
stock are so high, but also because the current owners may desire stock in the new company as they
anticipate further growth in a strong market.

Page | 108
 The Finance Club | Indian Institute of Management Kashipur

What is a leveraged buyout? How is it different from a merger?

Essentially, an LBO takes place when a fund wants to buy a company using more debt than cash with
the intention of exiting the investment usually within three to seven years perhaps after changing
management to increase profitability. What makes it a leveraged buyout is the fact that the acquiring firm
will fund the purchase of the company with a relatively high level of debt and then pay off the debt with
the cash flows produced by the firm. This means that by the time the fund is ready to sell the company,
the business will ideally have little to no debt, and the PE firm will collect a higher percentage of the
selling price and/or use the excess cash flow to pay themselves a dividend since the debt has been
reduced or paid off.

Page | 109
 The Finance Club | Indian Institute of Management Kashipur

What is a dividend recapitalization?

A dividend recap typically occurs in the middle of a PE firm’s investment in a company when that
company has been performing and paying down debt, reducing leverage. The owners of the business
(normally the PE firm) will go back to market looking to issue new debt both to repay the existing debt
and to fund a distribution to shareholders.

What is a merger model?

A merger model is a way to look at the financials of two companies, the purchase price, and how the
purchase is made to determine whether it is accretive or dilutive to the buyer. The analyst will first make
assumptions about purchase price and structure, and then project an Income Statement for the new
company and calculate an EPS number for the combined entity.

Page | 110
 The Finance Club | Indian Institute of Management Kashipur

Which type of synergy is most important?

Since cost-saving synergies such as a reduction in employees are typically more quantifiable than
estimates on gains from things like cross-selling, cost savings synergies are normally taken a bit more
seriously.

If a company could acquire another company using cash only, why would they
choose not to do so?
There are many reasons why a company may not simply finance a purchase with cash. Especially in
times of economic turmoil, a company may want to keep a healthy cushion of cash on the Balance
Sheet, so it can weather the storm. A company may not want to use cash if its stock is trading very
strongly. If the buying company’s stock is trading high, it gives the acquiring company a relatively “rich”
currency with which to make acquisitions.

Page | 111
 The Finance Club | Indian Institute of Management Kashipur

Financial Glossary
Page | 112
 The Finance Club | Indian Institute of Management Kashipur

Accretive merger: Amerger in which the acquiring company’s earnings per share increase.

Balance Sheet: One of the four basic financial statements, the Balance Sheet presents the financial
position of a company at a given point in time, including Assets, Liabilities, and Equity.

Beta: A value that represents the relative volatility of a given investment with respect to the market.

Bond price: The price the bondholder (the lender) pays the bond issuer (the borrower) to hold the bond
(i.e., to have a claim on the cash flows documented on the bond).

Bond spreads: The difference between the yield of a corporate bond and a U.S. Treasury security of
similar time to maturity.

Buy-side: The clients of investment banks (mutual funds, pension funds and other entities often called
“institutional investors”) that buy the stocks, bonds and securities sold by the investment banks. (The
investment banks that sell these products to investors are known as the “sell-side.”)

Page | 113
 The Finance Club | Indian Institute of Management Kashipur

Callable bond: A bond that can be bought back by the issuer so that it is not committed to paying large
coupon payments in the future.

Call option: An option that gives the holder the right to purchase an asset for a specified price on or
before a specified expiration date.

Capital Asset Pricing Model (CAPM): A model used to calculate the discount rate of a company’s cash
flows.

Commercial bank: A bank that lends, rather than raises money. For example, if a company wants $30
million to open a new production plant, it can approach a commercial bank like Bank of America or
Citibank for a loan. (Increasingly, commercial banks are also providing investment banking services to
clients.)

Commercial paper: Short-term corporate debt, typically maturing in nine months or less.

Page | 114
 The Finance Club | Indian Institute of Management Kashipur

Commodities: Assets (usually agricultural products or metals) that are generally interchangeable with
one another and therefore share a common price. For example, corn, wheat, and rubber generally trade
at one price on commodity markets worldwide.

Common stock: Also called common equity, common stock represents an ownership interest in a
company (as opposed to preferred stock, see below). The vast majority of stock traded in the markets
today is common, as common stock enables investors to vote on company matters. An individual with 51
percent or more of shares owned controls a company and can appoint anyone he/she wishes to the
board of directors or to the management team.

Comparable transactions (comps): A method of valuing a company for a merger or acquisition that
involves studying similar transactions.

Page | 115
 The Finance Club | Indian Institute of Management Kashipur

Convertible preferred stock: A type of equity issued by a company, convertible preferred stock is often
issued when it cannot successfully sell either straight common stock or straight debt. Preferred stock
pays a dividend, similar to how a bond pays coupon payments, but ultimately converts to common stock
after a period of time. It is essentially a mix of debt and equity, and most often used as a means for a
risky company to obtain capital when neither debt nor equity works.

Capital market equilibrium: The principle that there should be equilibrium in the global interest rate
markets.

Convertible bonds: Bonds that can be converted into a specified number of shares of stock.

Cost of Goods Sold: The direct costs of producing merchandise. Includes costs of labor, equipment,
and materials to create the finished product, for example.

Coupon payments: The payments of interest that the bond issuer makes to the bondholder.

Credit ratings: The ratings given to bonds by credit agencies. These ratings indicate the risk of default.

Page | 116
 The Finance Club | Indian Institute of Management Kashipur

Currency appreciation: When a currency’s value is rising relative to other currencies.

Currency depreciation: When a currency’s value is falling relative to other currencies.

Currency devaluation: When a currency weakens under fixed exchange rates.

Currency revaluation: When a currency strengthens under fixed exchange rates.

Default premium: The difference between the promised yields on a corporate bond and the yield on an
otherwise identical government bond.

Default risk: The risk that the company issuing a bond may go bankrupt and “default” on its loans.

Derivatives: An asset whose value is derived from the price of another asset. Examples include call
options, put options, futures, and interest-rate swaps.

Dilutive merger: A merger in which the acquiring company’s earnings per share decrease.

Page | 117
 The Finance Club | Indian Institute of Management Kashipur

Discount rate: A rate that measures the risk of an investment. It can be understood as the expected
return from a project of a certain amount of risk.

Discounted Cash Flow analysis (DCF): A method of valuation that takes the net present value of the
free cash flows of a company.

Dividend: A payment by a company to shareholders of its stock, usually as a way to distribute some or
all of the profits to shareholders.

EBIAT: Earnings Before Interest After Taxes. Used to approximate earnings for the purposes of creating
free cash flow for a discounted cash flow.

EBIT: Earnings Before Interest and Taxes.

EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization.

Enterprise Value: Levered value of the company, the Equity Value plus the market value of debt.

Page | 118
 The Finance Club | Indian Institute of Management Kashipur

Equity: In short, stock. Equity means ownership in a company that is usually represented by stock.

The Fed: The Federal Reserve Board, which manages the country’s economy by setting interest
rates.The RBI in Indian Scenario

Fixed income: Bonds and other securities that earn a fixed rate of return. Bonds are typically issued by
governments, corporations and municipalities.

Float: The number of shares available for trade in the market times the price. Generally speaking, the
bigger the float, the greater the stock’s liquidity.

Floating rate: An interest rate that is pegged to other rates (such as the rate paid on U.S. Treasuries),
allowing the interest rate to change as market conditions change.

Forward contract: A contract that calls for future delivery of an asset at an agreed-upon price.

Forward exchange rate: The price of currencies at which they can be bought and sold for future
delivery.

Page | 119
 The Finance Club | Indian Institute of Management Kashipur

Forward rates (for bonds): The agreed-upon interest rates for a bond to be issued in the future.

Futures contract: A contract that calls for the delivery of an asset or its cash value at a specified
delivery or maturity date for an agreed upon price. A future is a type of forward contract that is liquid,
standardized, traded on an exchange, and whose prices are settled at the end of each trading day.

Glass-Steagall Act: Part of the legislation passed during the Depression (Glass-Steagall was passed in
1933) designed to help prevent future bank failure - the establishment of the F.D.I.C. was also part of this
movement. The Glass-Steagall Act split America’s investment banking (issuing and trading securities)
operations from commercial banking (lending). For example, J.P. Morgan was forced to spin off its
securities unit as Morgan Stanley. Since the late 1980s, the Federal Reserve has steadily weakened the
act, allowing commercial banks to buy investment banks.

Goodwill: An account that includes intangible assets a company may have, such as brand image.

Hedge: A balance on a position in the market in order to reduce risk.

Page | 120
 The Finance Club | Indian Institute of Management Kashipur

High-yield bonds (a.k.a. junk bonds): Bonds with poor credit ratings that pay a relatively high rate of
interest, or can be bought for cents per dollar of face value.

Holding Period Return: The income earned over a period as a percentage of the bond price at the start
of the period.

Income Statement: One of the four basic financial statements, the Income Statement presents the
results of operations of a business over a specified period of time, and is composed of Revenues,
Expenses, and Net Income.

Initial Public Offering (IPO): The dream of every entrepreneur, the IPO is the first time a company
issues stock to the public. “Going public” means more than raising money for the company: By agreeing
to take on public shareholders, a company enters a whole world of required SEC filings and quarterly
revenue and earnings reports, not to mention possible shareholder lawsuits.

Investment grade bonds: Bonds with high credit ratings that pay a relatively low rate of interest, but are
very low risk.

Page | 121
 The Finance Club | Indian Institute of Management Kashipur

Leveraged Buyout (LBO): The buyout of a company with borrowed money, often using that company’s
own assets as collateral. LBOs were the order of the day in the heady 1980s, when successful LBO firms
such as Kohlberg Kravis Roberts made a practice of buying companies, restructuring them, and reselling
them or taking them public at a significant profit.

Liquidity: The amount of a particular stock or bond available for trading in the market. For commonly
traded securities, such as large cap stocks and U.S. government bonds, they are said to be highly liquid
instruments. Small cap stocks and smaller fixed income issues often are called illiquid (as they are not
actively traded) and suffer a liquidity discount, i.e., they trade at lower valuations to similar, but more
liquid, securities.

The Long Bond: The 30-year U.S. Treasury bond. Treasury bonds are used as the starting point for
pricing many other bonds, because Treasury bonds are assumed to have zero credit risk take into
account factors such as inflation. For example, a company will issue a bond that trades “40 over
Treasuries.” The 40 refers to 40 basis points (100 basis points = 1 percentage point).

Page | 122
 The Finance Club | Indian Institute of Management Kashipur

Market Cap (Capitalization): The total value of a company in the stock market (total shares outstanding
x price per share).

Money market securities: This term is generally used to represent the market for securities maturing
within one year. These include short-term CDs, Repurchase Agreements, Commercial Paper (low-risk
corporate issues), among others. These are low risk, short-term securities that have yields similar to
Treasuries.

Mortgage-backed bonds: Bonds collateralized by a pool of mortgages. Interest and principal payments
are based on the individual homeowners making their mortgage payments. The more diverse the pool of
mortgages backing the bond, the less risky they are.

Multiples method: A method of valuing a company that involves taking a multiple of an indicator such as
price-to-earnings, EBITDA, or revenues.

Page | 123
 The Finance Club | Indian Institute of Management Kashipur

Municipal bonds: Bonds issued by local and state governments, a.k.a., municipalities. Municipal bonds
are structured as tax-free for the investor, which means investors in muni’s earn interest payments
without having to pay federal taxes. Sometimes investors are exempt from state and local taxes, too.
Consequently, municipalities can pay lower interest rates on muni bonds than other bonds of similar risk.

Net present value (NPV): The present value of a series of cash flows generated by an investment,
minus the initial investment. NPV is calculated because of the important concept that money today is
worth more than the same money tomorrow.

Non-convertible preferred stock: Sometimes companies issue nonconvertible preferred stock, which
remains outstanding in perpetuity and trades like stocks. Utilities are the most common issuers of
non-convertible preferred stock.

Par value: The amount a bond issuer will commit to pay back, the principal, when the bond expires.

P/E ratio: The price to earnings ratio. This is the ratio of a company’s stock price to its
earnings-per-share. The higher the P/E ratio, the faster investors believe the company will grow.

Page | 124
 The Finance Club | Indian Institute of Management Kashipur

Put option: An option that gives the holder the right to sell an asset for a specified price on or before a
specified expiration date.

Securitize: To convert an asset into a security that can then be sold to investors. Nearly any
income-generating asset can be turned into a security. For example, a 20-year mortgage on a home can
be packaged with other mortgages just like it, and shares in this pool of mortgages can then be sold to
investors.

Selling, General & Administrative Expense (SG&A): Costs not directly involved in the production of
revenues. SG&A is subtracted as part of expenses from Gross Profit to get EBIT.

Spot exchange rate: The price of currencies for immediate delivery.

Statement of Cash Flows: One of the four basic financial statements, the Statement of Cash Flows
presents a detailed summary of all of the cash inflows and outflows during a specified period.

Page | 125
 The Finance Club | Indian Institute of Management Kashipur

Statement of Retained Earnings: One of the four basic financial statements, the Statement of Retained
Earnings is a reconciliation of the Retained Earnings account. Information such as dividends or
announced income is provided in the statement. The Statement of Retained Earnings provides
information about what a company’s management is doing with the company’s earnings.

Stock: Ownership in a company.

Stock swap: A form of M&A activity in whereby the stock of one company is exchanged for the stock of
another.

Strong currency: A currency whose value is rising relative to other currencies.

Swap: A type of derivative, a swap is an exchange of future cash flows. Popular swaps include foreign
exchange swaps and interest rate swaps.

10K: An annual report filed by a public company with the Securities and Exchange Commission (SEC).
Includes financial information, company information, risk factors, etc.

Page | 126
 The Finance Club | Indian Institute of Management Kashipur

Tender offers: A method by which a hostile acquirer renders an offer to the shareholders of a company
in an attempt to gather a controlling interest in the company. Generally, the potential acquirer will offer to
buy stock from shareholders at a much higher value than the market value.

Treasury securities: Securities issued by the government. These are divided into Treasury bills
(maturity of up to 2 years), Treasury notes (from 2 years to 10 years maturity), and Treasury bonds (10
years to 30 years). As they are government guaranteed, often treasuries are considered risk-free.

Underwrite: Most commonly, the valuing of a pre-IPO stock performed by investment banks when they
help companies issue securities to investors. Technically, the investment bank buys the securities from
the company and immediately resells the securities to investors for a slightly higher price, making money
on the spread.

Weak currency: A currency whose value is falling relative to other currencies.

Yield to call: The yield of a bond calculated up to the period when the bond is called (paid off by the
bond issuer).

Page | 127
 The Finance Club | Indian Institute of Management Kashipur

Yield: The annual return on investment. A high-yield bond, for example, pays a high rate of interest.

Yield to maturity: The measure of the average rate of return that will be earned on a bond if it is bought
now and held to maturity.

Zero coupon bonds: A bond that offers no coupon or interest payments to the bondholder

Page | 128
 The Finance Club | Indian Institute of Management Kashipur

References
I. Jacobson, D. (2016). Vault Career Guide to Finance Interviews. Retrieved from
http://www.vault.com
II. Beat The Streets 2- Investment Banking Interviews (2017). Retrieved from http://www.wetfeet.com
III. Oasis, W.(2013). WallStreetOasis Guide to Finance Interviews
IV. Internal Questionnaire - The Finance Club IIM Kashipur

Page | 129
/ The Finance Club KSP [email protected] 130