If you’re preparing for a structured finance interview, you need to arm yourself with the right questions. As a fast-growing area of finance, structured finance combines financial technology, legal entities and contracts, and structured investments to create unique solutions to real-world financial challenges. With its complexity and ever-evolving nature, being well-versed in the field is critical for success in any structured finance role. That’s why it’s important to make sure you go into your interview well prepared. To help you do that, we’ve compiled a list of the most common structured finance interview questions. These questions are designed to test your knowledge and understanding of structured finance, as well as your ability to think critically and solve problems. By familiarizing yourself with these questions, you’ll be in the best position to make an impact in your structured finance interview.
- Why are financial maintenance covenants important?
- What are some factors to look at when lending money to a prospective borrower? …
- What is Debt Capacity?
- What are some key credit ratios?
- What will influence the appropriate leverage level for a borrower?
What is structure finance?
Most Common Finance Interview Questions
The most typical and frequently asked financial interview questions have been compiled by us. Make sure you master the answers to these difficult questions below if you want to ace your finance interview. This manual is ideal for anyone going through a financial analyst job interview because it is based on actual questions used by major investment banks to decide who to hire.
You might also want to read our article on how to become a great financial analyst, where we discuss “The Analyst Trifecta,” in addition to this comprehensive guide to finance interview questions (and answers). ”.
You will encounter two main types of financial interview questions:
#1 Behavioral and fit questions focus more on soft skills like your capacity for teamwork, leadership, dedication, imaginative problem-solving, and general personality type. It’s important to be ready for these types of questions, and the best approach is to select 5-7 instances from your resume that you can use to demonstrate your leadership, teamwork, a weakness, hard work, problem-solving, etc. We’ve developed a separate guide to behavioral interview questions to assist you with this aspect of the interview.
#2 Specific accounting and finance topics are covered in technical questions. This guide focuses exclusively on technical finance interview questions.
General best-practices for finance interview questions include:
Finance Interview Questions (and Answers):
A company’s assets, liabilities, and shareholders’ equity are displayed on the balance sheet, or, to put it another way, the company’s assets, liabilities, and net worth. In the income statement, the company’s revenues, costs, and net income are shown. Three areas are represented on the cash flow statement: operating activities, investing activities, and financing activities.
Cash is king. A true picture of how much cash the business is generating is provided by the statement of cash flows. Ironically, it often gets the least attention. This question probably allows you to choose a different response, but you must give a compelling explanation (e g. , the income statement because it displays a company’s earning power and profitability on a smoothed-out accrual basis; or the balance sheet because assets are the real source of cash flow.
This is somewhat subjective. A good budget has support from all company departments, is realistic but aspires to success, has been risk-adjusted to allow for a margin of error, and is connected to the business’ overarching strategic plan. The budget process must be iterative and involve all departments in order to accomplish this. Depending on the kind of business you run, either zero-based (starting from scratch every time) or building off of the prior year is preferable. A good planning and budgeting calendar that everyone can use is essential.
A company should always optimize its capital structure. It can take advantage of the tax shelter provided by issuing debt if it has taxable income. It might make sense to issue debt if it lowers the company’s weighted average cost of capital if the firm has immediate steady cash flows and is able to pay the required interest payments.
WACC, or weighted average cost of capital, is determined by multiplying the proportion of debt to total capital by the debt interest rate and dividing the result by one less than the effective tax rate, along with the proportion of equity to capital by the required return on equity. Learn more in CFI’s free Guide to Understanding WACC.
Because debt is paid before equity and has collateral to support it, it is less expensive. Debt ranks ahead of equity on liquidation of the business. There are pros and cons to financing with debt vs. equity that a business needs to consider. The fact that debt financing is less expensive does not necessarily mean it is better. If further investigation is necessary, a good response to the question might highlight the trade-offs. Find out more information about the costs of debt and equity.
This question has four parts to it:
What effects will there be on the company’s EBITDA, net income, cash flow, and valuation in Part I? What effects will there be on the company’s EBITDA, net income, and cash flow in Part II?
Answer:
Part I) EBITDA is raised by the precise amount of capitalized R&D expense. The amount depends on the depreciation method and tax treatment as net income rises in Part II. Part III) Cash flow is essentially unaffected, but cash taxes may vary due to changes in depreciation expense, so cash flow may vary slightly. Part IV) The net present value (NPV) of cash flows is essentially constant, with the exception of the effects of cash taxes and timing.
It’s important to have strong financial modeling principles. Model assumptions (inputs) should, whenever possible, be centralized and clearly colored (bank models typically use blue font for model inputs). Additionally, effective Excel models make it simple for users to comprehend how inputs are transformed into outputs. To make sure the model is operating properly, good models also include error checks (e g. , the cash flow calculations are accurate, the balance sheet balances, etc. ). They have a dashboard with clear charts and graphs that show the key outputs with just the right amount of detail. For more, check out CFI’s complete guide to financial modeling.
Nothing. This is a trick question because the impact of inventory purchases only affects the balance sheet and cash flow statements.
The traditional definition of working capital is current assets minus current liabilities. Working capital is typically defined in the banking industry as current assets minus cash less current liabilities minus interest-bearing debt. It can also be described even more specifically as accounts receivable plus inventory less accounts payable. You can give a very comprehensive response if you are familiar with all three of these definitions.
Several industries, including the restaurant and grocery retail sectors, frequently have negative working capital. Customers pay in advance at a grocery store, and inventory turns over fairly quickly, but suppliers frequently offer 30 days (or more) of credit. This implies that the business receives payment from clients before it needs to pay suppliers. In companies with little inventory and accounts receivable, negative working capital is a sign of efficiency. In other cases, negative working capital may be a sign that a business is in financial trouble if it lacks the funds to cover its current obligations.
It’s crucial to take into account the company’s typical working capital cycle when responding to this interview question.
According to the company’s accounting principles, the purchase is capitalized and depreciated if it will be used by the company for more than a year.
When accounting for Property, Plant & Equipment (PP&E) on the balance sheet, there are essentially four factors to take into account: (I) the initial purchase, (II) depreciation, (III) additions (capital expenditures), and (IV) dispositions. You might need to take into account revaluation in addition to these four as well. PP&E is frequently the primary capital asset for businesses that produce revenue, profitability, and cash flow.
This is a classic finance interview question. The amount of the write-down is deducted from the inventory asset account and shareholders’ equity on the balance sheet. A charge for the write-down appears on the income statement as an expense in either cost of goods sold (COGS) or as a separate line item, which lowers net income. The write-down is added back to cash from operating activities on the cash flow statement because it is a non-cash expense (although it must not be double-counted in the changes of non-cash working capital). Read more about an inventory write-down.
Companies go through the M&A process for a variety of reasons, including to achieve synergies (cost savings), enter new markets, acquire new technology, get rid of a rival, and because it is “accretive” to financial metrics. Learn more about accretion/dilution in M&A.
[Note: Depending on who you’re interviewing with, you may want to be cautious about bringing up social considerations. These include ego, empire-building, and to justify higher executive compensation. ].
This is one of the great finance interview questions. Remain detached and provide a high-level overview of the business’s present financial situation or the state of businesses in that sector generally. Highlight something on each of the three financial statements.
What is Structured Finance?
The term “structured finance” refers to a practice in which banks pool loans secured by cash flow-generating assets into securities and offer “tranches” of these securities for sale on the capital markets. With the help of credit enhancements, each tranche of these securities can be made to be more or less risky than the “average loan” in the pool.
Mortgage-backed securities (MBS) and asset-backed securities (ABS) for auto loans, home equity loans, student loans, and credit card receivables are the most popular Structured Finance products.
Other examples include synthetic financial instruments, collateralized bond obligations (CBOs), and collateralized debt obligations (CDOs).
Companies (“originators”) use structured products to raise capital because they can frequently do so for less money overall than if they used conventional financing methods, like a corporate bond issued directly by the company.
Structured products appeal to lenders in markets like mortgages and auto loans because they offer liquidity and capital and make it simpler to issue future loans.
Last but not least, investors who purchase structured products like them because they allow them to earn higher yields on assets that are typically too risky to invest in directly but now do so with a lower risk if the products are built properly.
Structured Finance vs. Securitization
Securitization and structured finance are frequently used interchangeably, but there are some distinctions.
The primary one is that “Structured Finance” is a general term that can apply to any transaction that makes use of special-purpose vehicles (SPVs) to give loans “special features.”
The process of pooling loans, transforming them into a security, and selling tranches or “slices” of that security is known as “securitization.”
Therefore, even though project finance loans issued to fund infrastructure projects like power plants and toll roads are not securitized, they could still be categorized as “Structured Finance” transactions.
Because the everyday usage of structured finance and securitization is so similar, we won’t make a distinction between them in this article.
FAQ
What do you do in structured finance?
Banks pool loans backed by assets that generate cash flow into securities and offer “tranches” of these securities for sale on the capital markets. These securities use tools like credit enhancements to make each tranche riskier or less risky than the “average loan” in the market.
What questions do they ask in a finance interview?
- What do you Mean by Fair Value?
- What do you Mean by the Secondary Market?
- What is the Difference Between Cost Accounting and Costing?
- What do you Mean by Adjustment Entries? …
- What do you Mean by the Put Option?
- What do you Mean by Deferred Tax Liability?
- What is Goodwill?
What is a structured finance transaction?
Typically used on a scale that is too large for an ordinary loan or bond, structured finance is a sophisticated form of financing. Structured Finance includes things like syndicated loans, mortgage-backed securities, and collateralized debt obligations (CDOs), which were the C4 of the 2008 financial crisis.
What does a structured finance analyst do?
The Structured Finance Specialist will assess economic data, especially that pertaining to the promotion of mortgage-backed securities to investment bankers and professionals in the capital markets.
