They’re easier because there’s less to memorize, but they’re harder because you cannot prepare or practice in quite the same way.

Also, many questions do not necessarily have “correct answers”; interviewers ask them because they want to have an in-depth discussion about a certain topic.

Finally, it’s more difficult to generalize sales and trading interviews because they have a “choose your own adventure” element.

If you say you’re interested in exotic derivatives trading, you’ll get one set of questions.

But if you say you’re interested in corporate bond sales, you’ll get a completely different set of questions.

Before choosing an adventure, though, let’s start with the qualities that interviewers want to see in candidates:

Sales and Trading Interview Questions: What Do They Want to See?

The recruiting process typically starts with an online application, moves into a HireVue video interview or phone interview, and then concludes with an assessment center if you’re in EMEA or Hong Kong – or a Superday if you’re in North America.

“Interview questions” will come up in all parts of this process, from the HireVue or phone interview to the AC or Superday.

We’ve covered sales & trading assessment centers in the article on the rates trading desk, so please refer to that for tips.

Professionals want to see the following qualities in your responses to interview questions:

• A hunger to trade or sell.
• Quick thinking.
• The ability to take risks and stay calm under pressure.
• A willingness to go against the mainstream.
• A solid rationale for why you’re interested in S&T rather than related fields like asset management or hedge funds.
• Interest in a specific product, such as equity derivatives or sovereign bonds.

Being an athlete helps a lot because it demonstrates your drive and risk-taking ability.

Most candidates enter sales & trading out of undergraduate programs, but some are also hired from Master’s programs and MBA programs (though MBA hiring is far less prevalent).

There are also a few transfers from the middle office and other teams at the bank.

The main categories of sales and trading interview questions are:

1. Fit / Behavioral – Including your story and “Why trading? / Why sales?”
2. Market – Including your knowledge of recent events, key market indices and prices, and stock pitches or other trade ideas.
3. Product / Client – Can you explain the Greeks? Do you know what metrics like duration and convexity mean? For sales, how would you handle problematic clients?
4.  Brainteaser / Math – Quick, what’s 37 x 7? What about 261 + 839? How about the square root of 0.9?

The initial HireVue interview focuses on generic fit / behavioral questions, but a few simple market-based questions could also come up.

After the first round, interviewers will usually start by asking for your story, but they’ll quickly move into the other categories above.

Sales and Trading Interview Questions, Part 1: Fit/Behavioral Questions

There are 1.5 critical questions in this category – your story and the why S&T one, which is an extension of your story – and then a series of smaller ones.

“Walk Me Through Your Resume” or How to Tell Your Story

For this question, you can use the same outline recommended in our investment banking story template: The Beginning, Your Finance “Spark,” Growing Interest, and Why You’re Here Today and You’re Future.

The differences are:

1. You should say you’re interested in a specific product or strategy, such as options, commodities, FX, or swaps, and make sure you know that one product very well.
2. You should also say you want to work in a results-based environment and prefer a large bank because of the client/trading exposure and the network you’ll develop.

For sales, you can take a similar approach, but you should focus on developing client relationships rather than learning all the technical details of a product.

A reasonable example outline might look like this:

• Beginning – Grew up in [Country / City], went to school at [University Name], majored in [Major Name], and also did [Fun / Interesting Activity, Ideally a Sport] while there.
• Finance “Spark” – You won a trading competition in your first year by analyzing the software industry and longing a stock that rose 20% and shorting another one that fell 15%.
• Growing Interest – You started out doing an internship in PWM and liked the markets-based work, but you wanted to work in an environment that was more results-oriented… which led you to a small hedge fund, where you focused on currency swaps to assist in their hedging strategies. You did well there but wanted broader exposure to the staff and clients at a large bank.
• Why You’re Here Today + Your Future – You want to continue trading FX and learn other swap variants, and this bank has a particularly strong practice, so you’re confident it’s the right group for you.

Why Sales & Trading?

The expectation is that most students will enter sales & trading after completing previous finance internships – so, this question should not be difficult to answer.

Essentially, it’s the last two sections of your story above: explain how you started in Field X, moved to Field Y, which was closer to sales & trading, and how you now you want to move directly into S&T at a large bank.

You want to trade or sell [Product A], you want to be judged based on your results, and you want to [learn the technical product/trading details or build client relationships in that area].

Remember that the nature of the work doesn’t necessarily change much as you advance in sales & trading, so you can’t be too creative with your responses here.

Other Fit Questions

For other fit / behavioral questions, you can use the same approach recommended in the investment banking fit question article: prepare a “success” story, a “failure” story, and a leadership story, and use the STAR (Situation, Task, Action, Result) structure in your answers.

You can also think about your strengths and weaknesses, but they’re less important in S&T interviews because the skill set is more specialized.

The main difference is that you need to pick stories that demonstrate the traits that salespeople and traders want to see. For example:

• You came up with a contrarian strategy in a stock investing competition and placed well as a result.
• You were under pressure to turn around a student club before it ran out of funds in a matter of weeks, and you came up with a creative solution that saved everyone.
• You evaluated the risk of a new business and hedged your risk by testing it in small increments while maintaining a part-time job on the side.
• You analyzed a client’s portfolio and came up with new strategies that earned him above-market returns – even though he thought it was too risky at first.
• You were losing a debate competition, but you thought on your feet and found a way to spin your opponent’s argument that allowed you to come back from behind and win.

The themes are thinking quickly, mitigating risk, performing well under pressure, and generating profits.

There isn’t a big difference between sales and trading in this first question category.

You can skew your stories a bit more toward leadership and communication skills for sales and more toward profit generation and risk mitigation for trading, but that’s about it.

Sales and Trading Interview Questions, Part 2: Market Questions

Market-based questions span a wide range:

Tell me about a recent news story related to the financial markets and your opinion of it.

Pitch me a stock (or FX, option, bond, or other trade ideas).

If you had $10 million to invest, what would you do with it?

What’s the S&P 500 / Dow Jones / FTSE 100 / DAX / other index at? How has it trended over the past year? What about oil and gold prices?

These questions are not “difficult,” but you’ll need to read sources like the Financial Times (FT) or Wall Street Journal (WSJ) regularly because the answers change each day.

Pay special attention to the front page and “Markets” sections of both.

We’ve covered hedge fund stock pitches extensively before, and you can follow the outlines and examples there.

But there are a few additional points to note in the context of sales and trading interview questions:

1. Length – Aim for 60-90 seconds; they’ll lose interest if you go on much longer than that.
2. More Than Just Long/Short Equities – For example, you could recommend purchasing call options or put options or using other derivatives to execute your idea. And you could pitch an idea related to FX, bonds, commodities, or almost anything else.
3. Your Edge – What is the catalyst that will cause the security’s price to change, and why is it not already priced in? What do you know about this idea that the rest of the market does not?
4. Stop Losses, Timeframe, and Risk Factors – These are all more important in S&T pitches, but you won’t have time to go into them in-depth in only 60-90 seconds, so briefly mention the basics and move on.

It’s best to develop one long idea and one short idea based on equities or credit (or potentially their derivatives) and another “macro” idea based on FX, sovereign bonds, commodities, or something else in that sphere.

For some example pitches, refer to the stock pitch or equity research recruiting articles.

Other Market Questions

For the one about where you’d invest $10 million, always start by asking for the person’s goals and risk tolerance and then giving high-level percentages by asset classes.

It’s pretty straightforward: younger people can afford to take more risk by weighting equities more heavily, while older people need to conserve capital because they can’t afford large drawdowns, so they’ll tend to put less in equities.

But you also need to factor in the macro environment.

For example, if interest rates are currently very low or negative, a traditional 60/40 stock/bond allocation may not make sense, especially if the person’s main concern is income generation in retirement.

It might make more sense to swap the bond allocation for precious metals, alternative assets, or real estate – anything that might generate cash flow or increase in price when interest rates are extremely low.

In terms of facts and figures, you should have a good idea of the following, both recently and over the past 6-12 months (check Bloomberg and markit.com):

• Equities: US – DJIA, S&P 500, and VIX; Europe – Estoxx, FTSE 100, and VStoxx; Asia – Nikkei and Shanghai Composite
• Credit: CDX NA IG, CDX NA HY, iTraxx Europe, iTraxx XO; SovX WE, SovX CEEMEA
• FX: EUR / USD, USD / JPY, GBP / USD, RMB / USD
• Commodities: Oil and gold
• Interest Rates: LIBOR (or SOFR when it’s phased out), Fed Funds rate, and rates set by the BOE and ECB; also, 2-year and 10-year Treasury yields

Sales and Trading Interview Questions, Part 3: Product / Client Questions

These questions depend heavily on the roles that you say you’re interested in.

If you mention equity derivatives, expect questions about the Greeks and hedging the risk of each one.

If you mention sovereign or corporate bonds, expect questions about bond math.

And if you say you’re interested in sales, expect questions about how you work with clients and recommend products.

These questions also depend heavily on your degree and work experience; expect far more detailed questions if you’ve had direct experience with a certain product.

For this entire category, please refer to our equity trading and fixed income trading articles and the book recommendations there and at the end of this article.

Here are a few sample questions and answers in different categories:

Q: What is a derivative security, and how is it used?

A: A derivative is a security whose value is based on the price of another security (the underlying). The relationship can be linear, convex, concave, or a mix of both.

The simplest derivatives are call options and put options on stocks, which give you the right, but not the obligation, to buy or sell a stock at a strike price within a certain period.

Derivatives are often used to hedge portfolios, such as by buying put options on an index to protect against a market crash.

They can also improve the risk-reward on specific trades, such as with a call spread (long a call option at a lower strike price and short a call option at a higher strike price) if you’re confident of a stock reaching a specific price level.

Q: What does the “convexity” of options mean?

A: It means that the downside is limited, while the upside is unlimited.

For example, with a call option, the only risk is that you pay money for the option, and the company’s stock price does not reach the strike price before expiration, so you cannot buy the underlying stock.

At worst, you lose that small initial sum; at best, you might be able to earn a huge amount if the stock moves far beyond that strike price.

Q: Explain Black-Scholes intuitively.

A: The Black-Scholes formula values options based on the underlying security’s price, its dividend yield, the option’s time to expiration, the strike price, the risk-free rate, the implied volatility, and a cumulative density function.

For a call option, it estimates the probability of the underlying stock reaching various prices, including the strike price, according to a lognormal distribution.

It sums up the expected value (value * probability) at each possible price “under the curve” to determine the option’s value.

If the strike price and stock price are closer, the probability of reaching the strike price is higher, so the option is worth more; higher volatility boosts the option’s value for the same reason.

As the time to expiration decreases, the option is worth less because the probability of exceeding the strike price goes down as more time passes.

And as the dividend yield increases, the option also becomes worth less because you’re missing out on more of the underlying stock’s dividend.

Q: What is delta, and how does it change with the underlying’s price, volatility, and the passage of time?

A: Delta is the first derivative of the option’s value with respect to the underlying security’s price, i.e., it tells you how quickly the option’s value changes as the stock price changes.

It also represents the amount of the underlying stock you must own to be delta hedged, i.e., to offset gains and losses on the option with gains and losses on the stock.

Delta moves from 0 to 1 as the option goes from out-of-the-money (stock price is below the strike price) to in-the-money (the opposite), and it’s 0.5 when the option is at-the-money (stock price = strike price).

The intuition is that the option starts to behave more like the underlying as the underlying’s price rises; on the other end, the option is not sensitive to changes in the underlying’s price when it’s deeply out-of-the-money.

Higher volatility increases delta for out-of-the-money options and decreases it for in-the-money options, and increasing the time to maturity has the same effect.

Q: What about gamma?

A: Gamma is the second derivative of the option’s value with respect to the underlying security’s price, so it gives you delta’s rate of change.

Gamma is highest when the option is at-the-money (ATM) because delta is the most sensitive to changes in the underlying price there; it decreases as an option moves further out-of-the-money (OTM) or in-the-money (ITM).

Increased volatility increases gamma for ITM and OTM options but reduces gamma for ATM options, and increasing the time to maturity has the same effect.

Q: What is the yield to maturity (YTM) of a bond, and how do you use it?

A: We have a video tutorial on this exact topic: how to approximate the yield to maturity.

The YTM is the internal rate of return (IRR) on a bond if you purchase the bond at its current market value, collect all the interest payments, and then receive the bond’s face value back upon maturity.

The YTM is used to price bonds; if the YTM is below the coupon rate, the bond is trading at a premium to face value, and if the YTM is above the coupon rate, the bond is trading at a discount to face value.

Q: What are the duration and convexity of a bond, and how do you use them?

A: Duration is the first derivative of the bond’s price with respect to the YTM (or “prevailing yields on similar bonds”), and convexity is the second derivative of the bond’s price with respect to the YTM.

So, duration tells you how sensitive a bond’s price is to changes in interest rates or “prevailing yields on similar bonds.”

And convexity gives you the rate of change of the duration as the YTM changes.

Intuitively, duration tells you how long it will take for a bond to be repaid with its internal cash flows. You can think of it as the “weighted maturity of the cash flows.”

So, it’s 10 for a 10-year, zero-coupon bond and some number less than 10 for a 10-year bond with a positive coupon rate.

It also measures interest-rate risk because the longer the duration, the more the bond’s price will change as interest rates change.

Investors often use duration and convexity to manage their bond portfolios and ensure that they have the proper exposure to changes in interest rates.

Q: What factors influence foreign currency exchange rates?

A: Key factors include fiscal and monetary policy, the balance of trade levels, inflation levels, and economic growth.

For example, if one country is increasing its money supply (i.e., “printing money”) significantly more than another country, its currency will become less valuable – assuming that no other factors changes.

A country with higher interest rates will also tend to have a more valuable currency because higher interest rates create more investor demand for that currency.

Sales and Trading Interview Questions, Part 4: Brainteaser / Math Questions

First, note that if you say you’re interested in sales, you’re extremely unlikely to receive brainteaser or mental math questions.

So, worry about these questions only if you’re interviewing for trading roles.

With brainteasers, the best tip is to get a good book and go through as many practice examples as possible.

Always think out-loud and explain your assumptions, and if you get stuck, state what you’re thinking so far and what you need to continue.

Pure brainteasers are a bit less likely in sales & trading interviews at large banks and tend to be more common in prop trading and quant fund interviews.

Mental math questions, however, will come up in any of these roles. Again, you should get a good book that explains all the tricks, but here are a few examples:

Addition

The trick here is to break up “ugly” numbers into round ones:

• 87 + 94 = (87 + 90) + 4 = 181
• 334 + 567 = (300 + 567) + 34 = 867 + 30 + 4 = 897 + 4 = 901

Subtraction

Subtraction questions are similar, but you need to decide when to round up.

For example, if the second number’s second digit is bigger than the first number’s second digit, round up:

• 62 – 27 = 62 – 30 + 3 = 32 + 3 = 35
• 845 – 388 = 845 – 400 + 12 = 445 + 12 = 457

Multiplication

Multiplying a 2- or 3-digit number by a 1-digit number is straightforward because you just separate them into smaller groupings:

• 47 x 5 = (40 x 5) + (7 x 5) = 200 + 35 = 235
• 397 x 4 = (300 x 4) + (90 x 4) + (7 x 4) = 1200 + 360 + 28 = 1588

For 2×2 multiplication, put the number with the larger second digit first and then group them into smaller units once again:

• 42 x 37 = 37 x 42 = (37 x 40) + (37 x 2) = (30 x 40) + (7 x 40) + (37 x 2) = 1200 + 280 + 74 = 1554

Squaring 2-Digit Numbers

This formula is the trick for squaring 2-digit numbers:

• X^2 = (X + Y) * (X – Y) + Y^2

And then you set Y such that either (X + Y) or (X – Y) ends with “0.” Examples:

• 49^2 = (49 + 1) * (49 – 1) + 1^2 = 50 * 48 + 1 = 2500 – (50 * 2) + 1 = 2401
• 56^2 = (56 + 4) * (56 – 4) + 4^2 = 60 * 52 + 16 = 60 * 50 + 60 * 2 + 16 = 3000 + 120 + 16 = 3136

Square Roots

There are fewer “tricks” with square roots because no matter what you do, the answer will usually have decimal places.

But you can usually approximate the answer by thinking in terms of square numbers.

For example, let’s say they ask you the square root of 90:

• You know that 9^2 = 81 and 10^2 = 100.
• And 90 is slightly closer to 81 than 100.
• So, you can say “slightly less than 9.5” (it’s ~9.49).

Case Studies? Programming Tests?

You’ve probably seen articles and stories about how “everything” in sales & trading is becoming more tech and programming-oriented – especially in areas like cash equities.

Based on that, you might wonder if you’ll get coding exercises or programming tests, as you would at a quant fund, prop trading firm, or tech company.

My experience is no, probably not – at least if you’re applying for traditional sales and trading roles rather than IT/engineering jobs.

It helps to know some Python and VBA, and you will increasingly use them on the job.

However, a senior trader is unlikely to ask you to solve a coding exercise on the spot in an interview because traders at banks aren’t necessarily programming experts.

For case study tips, see the rates trading desk article.

I wouldn’t recommend spending much time on case preparation if you’re in North America because most interviewers will still ask the standard questions.

Questions At the End and Thank You Notes

Yes, you should always ask the interviewer(s) questions at the end.

Focus on the person’s specific experiences rather than something generic:

• “In the past, you have hired many interns. What separated the ones who succeeded from the ones who did not?”
• “What do you now know that you wish you had known at the start of your career, and how would it have impacted your choices along the way?”
• “Which other divisions or desks have you worked in, and why did you eventually switch to this one?”

After the interview, you should send a thank-you email within 24 hours.

Thank the interviewer for their time, bring up something that you discussed, and if you did not know the answer to an interview question, remind them of the question and include the answer.

These emails won’t always help you, but they definitely won’t hurt, and they only take a few minutes to send.

How to Practice for In-Person, Video, and HireVue Interviews

The recruiting process has become far more impersonal because of HireVue and other pre-recorded interview technology.

To prepare for these interviews, you should practice by recording yourself under similar conditions:

• Queue up 4-5 randomized questions.
• Give yourself 30 seconds to prepare an answer for each one.
• And then give yourself 2-3 minutes to record an answer.

It will be uncomfortable to watch yourself, but you’ll need to do it if you want to improve.

Take a look at all the potential mistakes in our HireVue interview guide and watch for each one as you review the footage.

If you want to practice the market, math, and product questions, you should find older students who have won offers and ask them for a few mock interviews.

But I’ll be honest: your time is better spent developing your trade ideas, learning a specific product, and making sure you know the markets very well.

Since sales & trading interviews often turn into detailed discussions about products or trade ideas, mock interviews only help so much.

What If You Don’t Get an Offer?

If you don’t win an offer, you could say thanks, ask for feedback, and move on.

But if you feel you were not judged fairly or that the interview was conducted under poor conditions, you could go back and argue for another chance.

There are stories of candidates who failed to win an offer initially but who then argued for additional interviews and eventually received offers.

While this strategy can work, the risk is that most undergrad-level candidates are not great at determining whether the interview process was “fair.”

And there’s a thin line between being persistent and turning into a stalker.

So, if there was a glaring issue in your process, such as a poor connection or an interviewer who was not paying attention and had to leave midway through, sure, go ahead.

But if you could not answer certain questions or discuss your trade ideas effectively, this strategy is not a great idea.

Sales and Trading Interview Questions: Your Checklist and Recommended Books

Summing up everything above, here’s what you should have before going into any S&T interview:

• Your story and why you want to do S&T over anything else – including related fields like asset management and equity research.
• Three (3) “short stories” from your resume/CV that demonstrate the key qualities required in S&T (drive, risk-taking, profit generation, performing under pressure, and client communication for sales).
• Knowledge of the market indicators listed above, plus a sense of how they’ve changed over the past 6-12 months.
• Three (3) trade ideas or stock pitches, including a long idea, a short idea, and an FX/global macro/volatility/credit/non-stock idea.
  • For each trade idea, make sure you have a profit target, a stop loss, a time frame for the trade, and the top 2-3 risks.
• One (1) recent article or news story related to the financial markets and your opinion.
• Knowledge of a specific product that you’re going to say you’re interested in; enough to answer the types of sample questions above.
• And at least a few hours of practice with mental math and brainteaser questions.

To learn more about the technical details of specific products, as well as math and brainteaser questions, check out:

• Heard on the Street (for various quantitative questions)
• Short-Cut Math
• Options, Futures, and Other Derivatives (classic reference)
• Exotic Options Trading
• Interest Rate Swaps and Their Derivatives
• Foreign Exchange: A Practical Guide to the FX Markets
• The Handbook of Fixed Income Securities (classic Fabozzi reference)

You don’t need to learn “everything” in these references – pick a specific product and read the relevant book or sections within a book.

Do that, and you’ll be as prepared as you can be for sales and trading interview questions.

The post Sales and Trading Interview Questions: The Full Guide appeared first on Mergers & Inquisitions.

Or, you might not think of anything at all, since there’s much less information about the debt markets than there is about the equity markets.

Everyone can recall famous IPOs of technology companies, but hardly anyone outside the finance industry can name a “famous” debt offering.

Debt is lower-profile than equity, but it also offers many advantages – both to the companies issuing it and the bankers advising them in the context of DCM.

Similar to its counterpart, Equity Capital Markets, Debt Capital Markets is a cross between sales & trading and investment banking.

But that’s where the similarities end:

Debt Capital Markets Explained: What You Do in the DCM Group

Definition: A Debt Capital Market (DCM) is a market in which companies and governments raise funds through the trade of debt securities, including corporate bonds, government bonds, Credit Default Swaps etc.

Therefore, in the DCM Team, you advise companies, sovereigns, agencies, and supra-nationals that want to raise debt.

“Raising debt” means that an entity borrows funds and then pays interest on those funds – as opposed to equity, where the entity sells a percentage ownership in itself and pays no interest.

It’s similar to borrowing money for a student loan or mortgage, but organizations do it on a much greater scale than individuals.

As a junior-level banker in this group, you’re responsible for three main tasks:

• Pitching clients and potential clients on debt issuances and answering their questions.
• Executing debt issuances for clients.
• Responding to requests from other groups, updating market slides, and creating case studies of recent deals.

As a specific example of task #1, a company might come to you and say:

“We have $500 million of debt maturing in 5 years. Interest rates have fallen, so we think we could ‘refinance’ by raising new debt at a lower interest rate and using the proceeds to repay the existing issuance.

However, we’d also have to pay a prepayment penalty fee if we do that. Does this plan make sense? What terms could we get on the new debt? What interest rate is necessary for us to come out ahead?”

Or, a company might ask you something like:

“We want to raise debt to fund our everyday operations – what type do you recommend, and what should we expect regarding the interest rate, maturity, and prepayment penalty?”

You’ll answer these types of questions and advise organizations on their best options.

On the execution side – task #2 – much of your work will consist of drafting memos for internal committees and sales teams.

These memos help get your bank comfortable with deals and provide the sales force with the numbers and analysis they need to ‘sell’ the offerings to institutional investors.

Finally, you will also spend a fair amount of time answering requests from industry groups and product groups, updating market slides, and creating case studies of recent debt deals.

There is some quantitative and financial modeling work, but it is usually not as in-depth as you might think.

DCM tends to be a higher-volume, lower-margin business than ECM.

The global credit markets are far bigger than the global equity markets, there are more deals, and the deals happen more quickly – days rather than weeks or months.

As a result, investment banks charge lower fees than they do for, say, IPOs, and they have to make up for it with higher deal flow.

Debt Capital Markets vs. Leveraged Finance vs. Corporate Banking

Several other groups at investment banks also advise on debt issuances; the two most similar ones are Leveraged Finance and Corporate Banking.

The differences between these three departments vary from bank to bank.

DCM is different from Leveraged Finance because it focuses on investment-grade issuances that are used for everyday business purposes.

By contrast, Leveraged Finance focuses on higher-risk, higher-yielding issuances (“high-yield bonds”) that are often used to fund acquisitions, leveraged buyouts, and other transactions.

Corporate Banking groups focus on “bank debt” (Revolvers and Term Loans) that is kept on the bank’s Balance Sheet and not syndicated to outside institutional investors.

By contrast, DCM focuses on investment-grade bonds that are syndicated and sold to outside investors.

These are general guidelines, but in practice, there can be significant overlap between these groups, and there may be exceptions to these guidelines.

For example, Leveraged Finance is sometimes called “Leveraged Debt Capital Markets,” and a DCM team might focus exclusively on syndicated debt assignments of all types.

DCM Interview Questions and Answers

As with any other IB group, some students intern in DCM and accept full-time offers there, while others are placed into the group via a sell-day or off-cycle recruiting.

Sometimes lateral hires with credit analysis experience at rating agencies or corporate banking join, and you’ll find former industry coverage bankers here as well.

The recruiting process is similar to the one for any other investment banking role: Start early or be left behind!

The main difference is that the interview questions are often closer to the ones you might receive in sales & trading interviews.

Since DCM is a hybrid group and often sits on the trading floor, interviewers from fixed-income trading desks could easily ask you questions about how to hedge interest rate or FX risk (for example).

You could even get macroeconomic questions about the activities of central banks or the impact of trade policy on FX rates.

At the minimum, you should have a solid understanding of bond analysis: Yields, prices, call and put options, the yield to maturity (YTM) and yield to worst (YTW), make-whole analysis, and how companies think about refinancing decisions.

You should also know something about how credit ratings are assigned, why companies raise debt vs. equity, and how to advise a company on the most appropriate type of debt.

We cover these points in the IB Interview Guide in the Equity vs. Debt section and in more depth in the Core Financial Modeling (CFM) course:

The Interview Guide is best for more of a “quick review,” while the CFM course is more about learning the concepts from the ground up, for both interview prep and internship/full-time job preparation.

You should also be prepared to discuss debt market trends; you can find that information on sites such as LeveragedLoan.com and sometimes directly from banks (ex:  Société Générale’s year-end reports).

To prepare for deal discussions, you can look at GlobalCapital’s list of recent bond issuances and research the names you find there.

Finally, if you’re still in the networking phase, check out the Fixed Income Analysts Society, Inc. (FIASI) and the CFA Society.

The DCM Team Structure: Variance 101

The structure of Debt Capital Markets teams varies a lot because of the hybrid nature – some banks might even combine DCM with Leveraged Finance.

Some teams are divided into corporate vs. government issuers, and then they are further divided into industry verticals.

Just as in ECM, there’s also a syndicate team that’s responsible for allocating orders between different investors and building the books for bond offerings.

Junior Analysts typically work across a few verticals and then specialize as they move up the ladder.

DCM Jobs: Workstreams, Projects, and Sample Assignments

As in ECM, your main task in DCM is to tell stories about companies, governments, and other organization so they can raise capital more easily – but the plot points and characters in those stories differ.

For example, equity investors like to hear about the growth potential and upside of a company’s business, but debt investors care most about avoiding losses since their upside is capped.

As a result, they’ll focus on the stability of a company’s cash flows, its recurring revenue, the interest coverage, and the business risk.

They want to hear a story that ends with: “You’ll earn an annual yield of XX%, and even in the worst-case scenario, the company will still repay your principal.”

If you’re working in Debt Origination, you can expect these types of tasks:

• Market Update Slides: You might work with an industry coverage team to present your thoughts on financing alternatives in the current market. These pages can include details on the volume of capital raised, the number of offerings completed, the market’s total leverage, and the terms of recent offerings. Here are a few examples:
  • CEEMEA Markets Update by Citi
  • Credit Market Considerations by Goldman Sachs
  • Credit Materials (Pages 28-33) by Goldman Sachs
  • Credit Market Update by Merrill Lynch
• Debt Comparables (Comps): The idea is similar to comparable public companies (public comps) or Comparable Company Analysis, but since these are for debt issuances, they present very different data. You might show the issuer’s name, the offering date and amount, the coupon rate, the security type (e.g., senior secured notes vs. subordinated notes), the current price, the issuer’s credit rating, the Yield to Maturity (YTM) and Yield to Worst (YTW), and credit stats and ratios such as Debt / EBITDA, EBITDA / Interest, and Free Cash Flow / Interest. You can see a few examples below:

• Case Studies: You will also create slides on similar, recent offerings to motivate and inform prospective clients. To do this well, you’ll need to research an individual offering’s details, read through the term sheet, and assess the company’s performance following the offering. Here are a few examples:
  • Gazprom by ABN Amro
  • Industry and Construction Bank by ABN Amro
  • Bond Offering by Goldman Sachs
• Internal Memorandum: You’ll draft this document to set the narrative about the proposed debt offering and to inform your bank’s internal committee of the risks involved. Typical sections include:
  • Situation Overview
  • Credit Considerations
  • Risk Factors
  • Transaction Analytics and Financial Overview
    • Sources & Uses
    • Capitalization Table
    • Operating Summary and Credit Statistics
  • Company Information
  • Industry Overview
  • Business Unit Overviews
  • Comparables Analysis

It’s incredibly difficult to find public examples of this type of memo, so our team of ninjas did the next-best thing: They found leaked examples from everyone’s favorite failed bank:

• Debt and Equity Financing for Archstone-Smith Trust by Lehman Brothers
• Bridge Loan for Archstone-Smith Trust by Lehman Brothers

Yes, they’re old, but these memos do not change much over time, and it’s almost impossible to post anything recent and not get sued.

• Sales Team Memorandum: This one is similar to the equity sales force memorandum, but it’s slightly more technical. It helps sales professionals pitch the bond offering to potential investors, and it includes details such as:
  • Offering Summary (the purpose of the offering)
  • Key Dates and Road Show Schedule (an abbreviated timetable outlining the sequences of marketing to investors to offering pricing)
  • Summary Financials
  • Company Overview
  • Investment Highlights (why the investors should participate)
  • Summary Valuation
  • Products/Services Overview
  • Growth Strategy
  • Sources & Uses
  • Capitalization
  • Comparables Analysis and Operations Benchmarking
  • Risk Factors
• Speaking with Clients and Investors: You’ll do more of this as an Associate, but frequently investors will call the group to find out more about a company’s issuance – sometimes via the sales force. If everyone else is busy or gone, you’ll take these calls. The DCM group will also send out indicative pricing to clients each week so they can get an idea of the terms of new potential offerings.
• Financial Modeling: In credit analysis, you focus on building 3-statement models with different scenarios (e.g., Base, Downside, and Extreme Downside) and assessing how a company’s credit stats and ratios (Debt / EBITDA, EBITDA / Interest, etc.) change… at least in theory. In practice, you do little financial modeling in many DCM groups because investment-grade issuances are so straightforward to analyze. Bond pricing and terms are often based on a client’s credit rating and basic financial stats.

DCM Products: Originate, Structure, and Market

DCM deals differ based on the type of issuer (corporation vs. sovereign vs. agency vs. supranational vs. municipal) and the terms of the issuance.

For example, issuing senior secured notes for a mature industrial company will be quite different than issuing a 10-year bond for the government of Brazil.

Many people put debt into different categories, such as Senior Secured Notes vs. Junior Subordinated Notes vs. Subordinated Notes vs. Senior Notes vs. a laundry list of others.

That’s a useful start point, but it can get confusing because there’s overlap between the categories, and sometimes the dividing lines are not clear-cut.

It’s more helpful to think about the key terms of any bond issuance:

• Principal Amount: How much money the organization raised or is planning to raise.
• Coupon Rate: This is usually a fixed rate for corporate bonds, such as 5.0% or 7.0%. On the other hand, government bonds are often priced at spreads to prevailing rates such as the 10-year U.S. Treasury rate.
• Maturity Date: When does the organization need to repay the bond in full? Five years? Ten years? Thirty years (for government bonds)?
• Frequency: Many corporate bonds have semiannual (twice per year) interest payments, but some bond payments are annual, quarterly, or even monthly.
• Seniority: Where does this bond rank in the company’s capital structure? This point is critical in the case of a bankruptcy or liquidation scenario.
• Redemption / Redemption Prices: Can the organization repay the bond early? If so, how much extra will it pay to do so? Normally, corporate bonds cannot be repaid for the first few years after issuance, but they can be repaid as the maturity date approaches, according to a downward sliding scale of prepayment premiums (e.g., 103%, 102%, and 101% in the three years before maturity). A company might want to repay debt early to reduce its interest expense (if rates have fallen).
• Covenants: What does this issuance prohibit the company from doing? Maintenance covenants limit the company’s credit stats and ratios (e.g., it must stay below 5x Debt / EBITDA at all times), while incurrence covenants limit its actions (e.g., it cannot divest a division or issue dividends above a certain level).
• Original Issue Discount (OID): Was this bond issued at a discount to par value? If so, why? How is the amortization of this discount reflected on the financial statements?

To further complicate things, there are also different types of mandates besides bonds: Loans (more senior, with floating interest rates), asset-backed securities, and commercial paper, for example.

Other teams, such as corporate banking or structured finance, may take the lead on these assignments, with DCM involved but not necessarily leading the deal.

And Debt Capital Markets itself has grown to include products for hedging interest-rate and FX risk – which is yet another reason why it’s a hybrid group.

At PwC, there is even a team that covers debt capital advisory.

In a financing assignment, your team might act in any of the following roles:

• Bookrunning Manager
• Lead / Co- / Sole Manager
• Initial Purchaser
• Sole / Joint Placement Agent

Similar to equity deals, the bookrunners have the most responsibility and earn the highest fees.

When you work with an industry group at the bank, the industry group will provide the market analysis and valuation, and DCM will handle the credit analysis and answer questions about the pricing and terms of an offering.

The process of executing a debt deal isn’t that much different from the process of executing an equity deal.

The main differences are that borrowers issue debt more frequently and deals happen more quickly, so you don’t need to do as much work educating investors.

Finally, there are also block trades (bought deals) and agency transactions in some regions, such as Canada.

In bought deals, the bank acts as a principal and buys the client’s debt before reselling it to investors, and in agency deals, the bank acts as an agent and allocates the debt to institutional investors on a “best-efforts” basis.

DCM Hours

Since DCM sits between sales & trading and investment banking, the culture is also somewhere between those two.

In the best-case scenario, you might work close to “market hours,” i.e., roughly 12 hours per day on weekdays.

In practice, however, many DCM bankers work more than that, and the hours can approach the traditional IB grind.

That’s partially because it’s a higher-volume business, so you’re more likely to get staffed on deals consistently.

An average day might start with you at the desk at 7 AM, followed by team meetings with the sales force and traders.

Those two groups leave, and syndication stays behind to discuss possible and pending deals.

You finish up with meetings at 8 AM and then spend the next hour catching up on the news, overnight events, and monitoring traders in other offices.

Deals start launching when the market opens at 9:30 AM in NY (the market open time varies based on your region), so you’ll be quite busy if your bank is leading deals.

After that, the day varies based on your team’s deal flow. If you’re launching deals, you’ll have to monitor their performance and be around to answer questions.

If there are no live deals, a “quiet day” might consist of updating market slides, responding to requests from industry groups, and creating case studies based on recent bond offerings.

Debt Capital Markets Salary and Bonus Levels

At the Analyst level, compensation in DCM is similar to compensation in any other group.

However, the pay ceiling for Managing Directors and senior bankers is lower because fees and margins are lower, and the fees are split more ways.

A decent-performing MD in a financial center can still earn $1 million+ USD per year, but he/she is unlikely to go far beyond that.

Some argue that DCM offers better long-term career prospects than ECM because it’s “more stable” and bankers are less likely to be cut in downturns.

There is some truth to that because equity markets tend to shut down more quickly and decisively than debt markets; also, the skill set in DCM transfers to a wider variety of other fields.

But this claim is also a bit exaggerated because in a true recession, a lot of bankers across all groups will be cut.

DCM Exit Opportunities: Credit-Related Anything?

The good news is that you do have access to a wider set of exit opportunities in DCM than you do in ECM.

Not only could you move to different groups at your bank, but you could also apply to Treasury roles in corporate finance at normal companies, credit rating agencies, corporate banking, and credit research.

The bad news is that DCM is still not an ideal group for getting into private equity or getting into hedge funds.

“But wait,” you say, “you work with debt in DCM. Private equity firms use debt to do deals! And many hedge funds are credit-focused! They should want DCM bankers.”

Yes, but the problem is that PE firms use debt to fund transactions – whereas most debt issuances in DCM are not M&A/LBO-related.

As a result, you don’t get much practice with modeling acquisitions or leveraged buyouts or understanding the dynamics of those deals.

Also, while there are quite a few credit-focused hedge funds, most invest in high-yield bonds, mezzanine, or other securities with higher risk/potential returns instead of investment-grade issuances.

So, if you’re interested in private equity careers or hedge fund exits, you’re better off joining a strong industry group or M&A team.

But if you want to make a long-term career out of banking, DCM is a good option since you’ll have a better lifestyle and you’ll still earn a lot.

And if you’re interested in other credit-related roles, or in corporate finance at normal companies, Debt Capital Markets also gives you solid options.

So Why Work in Debt Capital Markets?

Similar to ECM, DCM tends to attract a lot of negative comments online – often from people with zero experience in the finance industry.

It isn’t necessarily “the best group,” but it’s still far better than most entry-level jobs outside of investment banking.

And if you intern or work in the group and find out it’s not for you, just transfer to another team – they’re always looking, especially after bonuses are paid.

The post Debt Capital Markets (DCM): The Definitive Guide appeared first on Mergers & Inquisitions.