Nick's Finance Interview Questions

This section is on Finance Interview Questions...
Largely Fixed Income.
These are some of my favourite interview questions to ask in a finance interview.
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1. Finance Interview Questions - 1 year Call option
For a stock, the spot price is 100, Volatility is zero and the risk free interest rate is 5%.
What's the price of the 1 year at the money call option ?
2. Finance Interview Questions - What is a bond ?
What is a bond ?
3. Finance Interview Questions - What is an interest rate swap ?
What is an interest rate swap ?
4. Finance Interview Questions - What is an Asset Swap ?
What is an Asset Swap ?
5. Finance Interview Questions - Relative Value
What is a better measure of the relative value of a bond ?
.. Yield or Asset Swap Spread ?
6. Finance Interview Questions - Bond Duration
What has a higher duration, a 10y 5% coupon bond, or a 5y 10% coupon bond ?
10y 5% coupon bond
10y 5% coupon bond
7. Finance Interview Questions - Interest Rate Swaps
Name as many things you can think of that might affect the price of an interest rate swap.
8. Finance Interview Questions - Zero Coupon Bonds
Zero Coupon Bonds Question Part1:
You are a trader, and you buy a 5y Zero Coupon Bond today.
What's the accrued interest ?
What's the duration ?
Interest rates go up, do you make or lose money ?
What would you pay for it ?
How much do you make or lose if the continuously compounded zero curve shifts upwards by 1 basis point ?
9. Finance Interview Questions - Zero Coupon Bond Part 2
Zero Coupon Bond Question Part2:
You sell a 10 year zero coupon bond to add to your portfolio.
What happens if yield curve flattens ?
.. Do you make or lose money ?
What has higher convexity ?
How much of the 10 year zero coupon bond would you sell in order to be immune to a 1 basis point parallel shift upwards or downwards in the continuously compounded zero curve ?
10. Finance Interview Questions - What is RISK ?
What is RISK ?
... this is a great question, and worth asking to CEOs of major investment banks cos they clearly don't understand it. I guarantee they get it wrong.
11. Finance Interview Questions - More on RISK
Name 5 types of risk a Bank might have to manage.
12. Finance Interview Questions - What is credit risk ?
What is credit risk ?
13. Finance Interview Questions - Bootstrap Yield Curve
How would you Bootstrap a Yield Curve ?
14. Finance Interview Questions - Discount Factor
What is a Discount Factor ?
Describe the shape of a Discount Factor curve.
What's the difference between a zero coupon bond price and a discount factor ?
15. Finance Interview Questions - Yield Curve Risk
What's the riskiest part of the yield curve ?
Yield Curve Risk
The longer maturities are the riskiest. Here the duration /price sensitivity of interest rate instruments is greatest, and the instruments most illiquid.
16. Finance Interview Questions - Interpolation
What is Interpolation ?
What are the different ways commonly used to Interpolate ?
what is interpolation?
in FI finance, it's coming up with zero rates or par yields that are associated with certain time periods not quoted in the typical yield curve.
Typical:
3M
6M
1Y
2Y
5Y
10Y
20Y
30Y
interpolation finds rates between these time periods. can be linear, but cubic spline is the most popular.
Here is an interesting video
Here is an interesting video on Non-Linear interpolation (more info here)
17. Finance Interview Questions - Bond Rich / Cheap Spread
What is meant by Bond Rich / Cheap Spread ?
- How do you work out whether a bond is rich or cheap ?