The trading floors of major sell-side investment banks are laid out into distinct divisions. After these divisions, desks are made, and most of the time, each desk is only for one “product” or asset class.
As an example, Goldman Sachs’ sales and trading department is split into two main groups: FICC (fixed income, commodities, and currencies) and equities.
The number of desks that make up fixed income is almost always much larger than any other division. This is because “fixed income” is a very broad term that can refer to any type of fixed income instrument, like a bond or loan, issued by a government or a business.
Some of the desks you might find on any trading floor’s fixed income division are the following:
When you first start out in trading, fixed income is a great place to work because it has been less affected by changes in automation than other areas, like cash equities.
Fixed income sales and trading is also at the heart of any trading floor, and this part of the business usually brings in most of the money for the floor. In fact, fixed income revenues have gone up again at almost all of the big investment banks over the past year, often to levels close to records.
As I’ve said many times, it’s very important that you know what desks you’d like to be on before your sales and trading interviews. In an interview, you should never say that you’re only interested in fixed-income jobs because that could mean a lot of different desks with very different types of work.
With that said, lets cover some of the most common fixed income interview questions. You can use these questions to get a feel for the different kinds of interview questions that might be asked of you.
Landing a job as a bond trader is no easy feat Competition is fierce for these lucrative roles at top investment banks and asset management firms. That’s why you need to come prepared to showcase your skills during the interview process.
This complete guide goes over 26 of the most common interview questions for bond traders and gives you advice on how to ace them.
Whether you’re interviewing for an entry-level position or a senior trading role, this inside look will help you highlight your expertise so you can stand out from the pack. Let’s dive in!
Key Responsibilities of a Bond Trader
Before we get to the interview questions, it’s important to understand the core responsibilities of a bond trader.
Here are some of the main functions:
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Fixed-income securities, such as government bonds, corporate bonds, mortgage-backed securities, and other debt instruments, can be bought and sold. Traders aim to profit from spreads between bid and ask prices.
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Monitoring markets – Traders must closely analyze factors impacting bond prices such as interest rates, credit ratings, economic indicators, and geopolitics.
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Managing risk – Minimizing potential losses through hedging, diversification, and position sizing is paramount. Traders use duration, convexity, and other metrics to gauge risk.
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Generating trade ideas – Traders identify opportunities to buy and sell based on research, relative value analysis, client needs, and market trends.
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Executing trades – This involves leveraging trading platforms and building relationships with dealers and clients to efficiently transact.
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Supporting sales teams – Traders provide market color, actionable ideas, and liquidity to salespeople to facilitate client business.
Keeping these core functions in mind will help you demonstrate your fitness for the job throughout the interview. Now let’s get to the questions!
Bond Trader Interview Questions and Answers
Core Knowledge Questions
These bond trader interview questions aim to assess your understanding of fixed income fundamentals:
What’s the main role of a fixed income trader?
A fixed income trader’s primary role is to buy and sell debt securities like government and corporate bonds to generate profits for their firm. This involves actively monitoring markets to identify trading opportunities, managing portfolio risks, providing liquidity to clients, and executing trades efficiently. The goal is to use their expertise to capitalize on market movements.
What does it mean to have a flat price for a bond?
A flat price refers to a bond’s price excluding accrued interest. It represents the underlying principal value of the bond stripped of any interest that has accrued since the last coupon payment. Quoting bonds on a flat price basis allows traders to compare the intrinsic value of bonds without distortions from accrued interest.
What’s the difference between a loan and a bond?
The key differences between loans and bonds are:
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Loans have floating interest rates tied to benchmarks like LIBOR, while bonds have fixed coupon payments.
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Loans are typically senior secured debt while bonds are unsecured.
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Loans are arranged via banks while bonds are issued through capital markets.
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The loan market is largely illiquid while most bonds actively trade.
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Loans have tighter covenants and restrictions than most bonds.
What are benchmark treasuries?
Benchmark treasuries are the most recently issued U.S. government debt securities for a given maturity. For example, the current 10-year benchmark would be the most recently auctioned 10-year Treasury note. Benchmarks are the most liquid treasuries and are used for pricing models and to hedge interest rate risk.
What’s relative value analysis?
Relative value analysis involves comparing the prices of similar bonds to identify mispricings and arbitrage opportunities. Traders look for bonds that are cheap versus peers after adjusting for factors like credit quality, sector, duration, liquidity, etc. This allows them to profit from temporary price discrepancies.
Define current yield.
Current yield measures the annual return on a bond based on its market price. It is calculated by taking the annual coupon payments and dividing them by the current market price of the bond. Current yield gives traders a quick measure of valuation but does not account for capital gains or losses as interest rates fluctuate.
Trading Strategy and Execution
These bond trader interview questions test your trading skills and decision-making:
How do you adjust your trading strategy when volatility spikes?
When volatility spikes, it’s crucial to reduce risks by tightening spreads, decreasing position sizes, and increasing hedges. I’d also shift focus to more liquid instruments and emphasize short-term mean-reversion trades rather than directional bets. The goal is to become more nimble amid the uncertainty.
Walk me through your process for executing a large block trade without significant market impact.
Executing a large block trade requires a deliberate strategy:
- Analyze liquidity and sales trends to estimate potential market impact
- Leverage algorithms to slice the order into smaller tranches
- Use limit orders, VWAP, and TWAP to enter positions gradually
- Trade during periods of peak liquidity to reduce impact
- Leverage dark pools to anonymously trade large blocks
- Use broker relationships to find natural counter-parties for the trade
How would you hedge the interest rate risk in your book of long-duration corporate bonds?
To hedge the duration risk of a long corporate bond portfolio, I could short treasury futures or use interest rate swaps. Another effective option is to short U.S. Treasury bonds of a similar duration to the corporates. This allows me to isolate and hedge the rate risk specifically.
What indicators do you monitor to time your entry into trades? How do you know when to pull the trigger?
Some of the key indicators I analyze are liquidity metrics, technical factors like moving averages, flows into and out of bonds and sectors, yield spreads versus historical levels, momentum oscillators, and macro events implied by derivatives like Eurodollar futures. I pull the trigger when several indicators align and confirm the trade thesis.
Scenario and Behavioral Questions
These bond trader interview questions evaluate your judgment, ethics, and interpersonal skills:
A trade you recommended loses significant value shortly after. How do you respond?
First, I would analyze why it lost value and determine if my thesis was flawed or if it was simply bad luck. I would take responsibility for the recommendation and communicate transparently with my team and clients. Most importantly, I would reflect on lessons learned and use it to improve my risk management and analysis.
How would you advise a client interested in a complex product with risks you’re uncomfortable with?
I would professionally share my concerns and explain the risks involved so they can make an informed decision. I would suggest simpler alternatives that achieve their goals with less complexity. However, ultimately the client’s objectives come first, so if set on the product, I would connect them to colleagues with specialized expertise in that area.
If you observed unethical behavior from someone senior, how would you handle it?
Unethical actions should always be reported through the proper confidential channels. I would document any observations and collect information discretely to avoid broader impact. While it can be difficult to report someone senior, integrity and principles must come first in finance.
Tell me about a time you had to resolve a dispute with a colleague.
In resolving disputes, I avoid escalation by first discussing the issue calmly in private. I focus on solutions rather than blame. If we remain at odds, I suggest mediation through a neutral party. The team’s cohesion is most important, so I try to find common ground and repair working relationships.
What’s your approach to mentoring and developing junior team members?
I take an active interest in mentoring junior staff. I provide ongoing guidance and feedback. But I also give them room to demonstrate initiative and creativity. When they make mistakes, I use it as a coaching opportunity, not criticism. I get to know their unique goals and strengths to provide challenging assignments tailored to their growth.
Questions for Senior Candidates
For experienced candidates, expect more advanced technical and leadership questions:
How would you modify a corporate bond trading strategy if credit markets began to show signs of stress?
I’d reduce high yield positions and shift to higher quality credits with more liquidity. To hedge credit risk, I could use CDS indices or single name CDS. I’d analyze our credit portfolio using metrics like OAS spreads to identify the most vulnerable positions. During market stress, managing risk takes priority over seeking incremental yield.
What methods do you use for estimating forward interest rate curves and forecasting future bond prices?
Some of the main methods are:
- Modeling forward rates based on spot rates and expected short term rate movements
- Applying momentum and mean reversion to plot forward curves
- Using market indicators like futures prices to determine implied forward rates
- Fundamental analysis of economic conditions driving rates
- Quantitative models like Nelson-Siegel to estimate forward curves
How would you go about reducing reliance on leverage across the fixed income trading business?
I would analyze our leverage ratios across all portfolios and desks to identify outliers. For the highest levered areas, I’d set reasonable deleveraging goals, changing limits and requiring senior approval for exceptions. I’d establish proper oversight and escalation protocols. I’d also champion
What’s the primary distinction between a future and a forward?
Futures and forwards are both ways to bet on what will happen with a certain type of security in the future.
Futures are centrally cleared (via CME) with standardized language in the underlying contracts. Forwards are bespoke contracts between two counter-parties.
Market makers often use futures to protect their underlying exposure by buying or selling futures. This lowers the risk in their book.
When it comes to the treasuries market, futures are a very liquid market that is often more liquid than the cash market.
Forwards are used when a client wants specific risks that aren’t covered by standard futures contracts.
What desk within fixed income are you most interested in?
Here you need to begin to narrow down your areas of interest. As Ive mentioned many times before the most important thing to do here is be consistent.
Saying that you want to trade both treasury bonds (government bonds) and high yield bonds is a bit of a puzzle. While both are technically within the fixed income division, youre dealing with two wildly different kinds of desks.
What you need to do is decide what attributes of a desk you think youd like. Remember, no one is going to hold you to what you say in an interview. You arent committing yourself to anything, so just give your honest appraisal as of now.
The kinds of decisions you need to make are:
- Would you like to work on a flow desk, where hundreds of trades are made every day?
- Would you like to work on a desk with wide spreads that doesn’t have any trades going through it? This is related to the last point; with wider spreads, you take on more risk in every trade.
- Do you want to focus on a smaller group of securities? For example, trading one part of the yield curve for rates means you’ll mostly be dealing with a few types of bonds. In high yield trading, on the other hand, you’ll be dealing with a lot of different corporate issuers.
- Do you like to think about bigger picture themes? (Big picture themes are most important for rates trading.) For credit trading, you’ll probably be thinking about industry themes and how single issuers are doing.
In the end, everyone has different tastes, which is one reason I stress how important it is to take the time to learn what each desk does and what products you’re most interested in.
You should talk to people who are interested in treasury, TIPS, and MBS sales or trading if you want to flow trade with a small set of securities and think about macro themes. If not, you should talk to people who work with investment grade, high yield, collateralized loan obligations (CLOs), and distressed debt.
Municipal Bond Trader interview questions
FAQ
What are the questions asked in a bond interview?
How to ask about bond in an interview?
What questions are asked in a fixed income trading interview?
Fixed-income trading interviews may also include in-depth technical questions about finance, banking, investing and trading. Some fixed income analyst or trader interviews also include questions regarding mathematical or logic puzzles. These questions can be a useful opportunity to demonstrate your industry knowledge and mathematical skills.
What questions should you ask during a trading interview?
Most interviews are likely to include many specific questions like this one, to test the applicant’s theoretical knowledge regarding all the tools that a trader can use and when they should be used. You should make sure you are up to date with all the theory related to trading before attending the interview.
Why do employers ask a bond trader a question?
Bond traders often need to be able to promote their company and services in new markets. This question helps employers understand your ability to sell bonds to clients who may not know about the company’s offerings. Use examples from previous experience where you helped a company expand into a new market or territory.
How do you answer a bond interview question?
This question can help the interviewer understand your analytical skills and how you apply them to a specific task. Use examples from past experiences where you used math, financial modeling or other quantitative methods to determine the value of a bond. Example: “I use several factors when determining the value of a bond.
