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Comments 41 Add comment. Private Equity Case Interview Samples. Hedge Fund Interviews. Dec 29, - pm. Madcatz, do u go to Duke? Best Modeling Courses - Finance Training. HF Interview Questions. Edit: I tried downloading it again, and it wouldn't let me. Maybe it's a one time use thing?
Hedge Fund Interview Questions. The framers of Glass- Steagall argued that a conflict of interest existed between commercial and investment banks. The conflict of interest argument ran something like this: 1 A bank that made a bad loan to a corporation might try to reduce its risk of the company defaulting by underwriting a public offering and selling stock in that company; 2 The proceeds from the IPO would be used to pay off the bad loan; and 3 Essentially, the bank would shift risk from its own balance sheet to new investors via the initial public offering.
A bank that consistently sells ill-fated stock would quickly lose its reputation and ability to sell IPOs to new investors. The feeding frenzy reached a height in the spring of Brown months before , and Citigroup was created in a merger of Travelers Insurance and Citibank. While some commercial banks have chosen to add I-banking capabilities through acquisitions, some have tried to build their own investment banking business.
JPMorgan stands as the best example of a commercial bank that entered the I-banking world through internal growth, although it recently joined forces with Chase Manhattan and, more recently, BankOne to form JPMorganChase. Interestingly, JPMorgan actually used to be both a securities firm and a commercial bank until federal regulators forced the company to separate the divisions.
Today, JPMorgan has slowly and steadily clawed its way back to the pinnacle of the securities business, and Morgan Stanley has merged with Dean Witter to create one of the larger I- banks on the Street. What took so long? So why did it take so long to enact a repeal of Glass-Steagall? There were several logistical and political issues to address in undoing Glass-Steagall. The two sides agreed on a compromise in which CRA requirements were lessened for small banks.
In November , Clinton signed the Gramm-Leach Bliley Act, which repealed restrictions contained in Glass-Steagall that prevent banks from affiliating with securities firms.
Investment banks create stocks and bonds, and sell these securities to investors. They are individual investors you and me and institutional investors, firms like Fidelity and Vanguard, and organizations like Harvard University. The universe of institutional investors is appropriately called the buy-side of the securities industry and includes asset managers, pension funds, insurance firms, and hedge funds. Growth in the institutional investor universe during the past ten years has been largely fueled by the growth in the hedge fund universe, representing over a trillion dollars of assets under management.
Fidelity, T. Rowe Price, Janus and other mutual fund companies represent a large portion of the buy-side business. Insurance companies like Prudential and Northwestern Mutual also manage large blocks of assets and are another segment of the buy-side. There is substantial overlap among these money managers—some, such as Putnam and T. Rowe, manage both mutual funds for individuals as well as pension fund assets of large corporations.
Hedge funds are one sexy component of the buy-side. Hedge funds pool together money from large investors usually wealthy individuals with the goal of making outsized gains. Essentially, a hedge fund uses its equity base to borrow substantially more capital, and therefore multiply its returns through this risky leveraging.
Buying derivatives is a common way to quickly leverage a portfolio. Because hedge funds have relatively few and wealthy shareholders, they remain largely unregulated.
There are literally thousands of hedge funds; some of the most notable names are Citadel, D. Often times, the heads of these firms are the best-paid individuals on Wall Street, many of them personally earning hundreds of millions of dollars in recent years it is rumored that Steven A.
Conversely, as the nature of the business is based on risk, quite often firms can collapse very quickly. The next two chapters are intended to provide a quick overview of the financial markets and what drives them, and introduce you to some market lingo as well. For reference, many definitions and explanations of many common types of securities can be found in the glossary at the end of this guide. Bears vs. Bulls Almost everyone loves a bull market, and an investor seemingly cannot go wrong when the market continues to reach new highs.
At Goldman Sachs, a bull market is said to occur when stocks exhibit expanding multiples—we will give you a simpler definition. A bear market occurs when stocks fall. More specifically, bear markets generally occur when the market has fallen by greater than 20 percent from its highs, and a correction occurs when the market has fallen by more than 10 percent but less than 20 percent.
An easy way to remember this principle is that, when attacking, a bull strikes up and a bear strikes down. The most widely publicized, most widely traded, and most widely tracked stock index in the world is the Dow Jones Industrial Average. The Dow was created in as a yardstick to measure the performance of the U. Initially composed of only 12 stocks, the Dow began trading at a mere 41 points. Today the Dow is made up of 30 large companies in a variety of industries and is measured in the thousands of points.
The stocks in the following chart comprise the index as of the publication of this guide. In , the Dow was hovering near , before soaring above 11, points in However, after correcting to mid s in , the Dow began an upward surge to its newest highs, above 13, Propelling the Dow throughout the late s was an upward was a combination of the success of U.
After a general economic downturn in , in addition to the terrorist attacks, the Dow retreated back to these early levels.
However, record low borrowing rates, abundant corporate cash balances, low default rates i. The NASDAQ Composite garnered significant interest in the late s years mainly because it was and still is driven largely by technology- related stocks.
Now, over 3, companies are listed on the stock exchange. April was that end; both indices started a slow slide that lasted over a year and coincided with a general economic malaise. The Dow fell 7. The plunge is a good illustration of how outside events affect the stock markets; investors feared the economic impact of the attacks and the ensuing military response.
In , for the first year since , the Dow Jones Industrial Index finished on an uptick, gaining Driving the gains in the market were low interest rates, a weaker dollar and low inventories. The only real downtick during the year, when stocks hit their lows, came in March during the outset of the war in Iraq. Since this uptick in , both indices have been on a long bull-market streak, with the Dow reaching record highs and the NASDAQ reaching levels not seen since although still very far from its levels.
In , , and , the Dow returned approximately 3. As mentioned earlier, fueling this streak has been investor confidence, low interest rates, and positive economic sentiment throughout all major Visit the Vault Finance Career Channel at www. Many investors expect that after such a long bull run, both indices are due for a correction.
However, with abundant investor cash balances, healthy corporate balance sheets, and positive economic indicators, the economy could have plenty of fuel left in its tank for an extended run. A Word of Caution about the Dow While the Dow may dominate news and conversation, investors should take care to know it has limitations as a market barometer.
For one, the Dow can move be swiftly moved by changes in only one stock. Roughly speaking, for every dollar that any Dow component stock moves, the Dow Index will move by approximately four points. Also, the Dow is only composed of immense companies, and will only reflect movements in large-cap stocks. The Dow tends to have more psychological significance to individual investors than to professional investors, who tend to follow broader market indices.
The Russell compiles small-cap stocks, and measures stock performance in that segment of companies. Furthermore, with the rise in Exchange Traded Funds ETFs , indices can be replicated and invested in, just like individual stocks. Note that Wall Street money managers tend to measure their performance against one of these market indices, not individual stocks.
This is the equity value of the company. Companies and their stocks tend to be categorized into three broad categories: large-cap, mid-cap, and small-cap. These companies tend to be established, mature companies, although with some IPOs rising rapidly, this is not necessarily the case.
Small-cap stocks tend to be riskier, but are also often the faster growing companies. What moves the stock market? Not surprisingly, the factors that most influence the broader stock market are economic in nature. Among equities, corporate profits and interest rates are king. Corporate profits: When Gross Domestic Product slows substantially, market investors fear a recession and a drop in corporate profits.
And if economic conditions worsen and the market enters a recession, many companies will face reduced demand for their products, company earnings will be hurt, and hence equity stock prices will decline. Thus, when the GDP suffers, so does the stock market. Interest rates: When the Consumer Price Index heats up, investors fear inflation. Inflation fears trigger a different chain of events than fears of recession.
Most importantly, inflation will cause interest rates to rise. Companies with debt will be forced to pay higher interest rates on existing debt, thereby reducing earnings and earnings per share. Why would an investor purchase a stock that may only earn 8 percent and carries substantial risk , when lower risk CDs and government bonds offer similar yields with less risk?
These inflation fears are known as capital allocations in the market whether investors are putting money into stocks vs. Investors typically re-allocate funds from stocks to low-risk bonds when the economy experiences a slowdown and vice-versa when the opposite occurs.
Every quarter, public companies must report EPS figures, and stockholders wait with bated breath, ready to compare the actual EPS figure with the EPS estimates set by Wall Street research analysts which are set from their continued conversations with the company. Conversely, a company that beats its estimates will typically rally in the markets. Earnings per share are often adjusted for unforeseen events, such as one-time charges, which allow investors to evaluate whether or not the core business of a firm is growing or declining.
It is important to note at this point, that in the frenzied Internet stock market of and early , investors did not show the traditional focus on near- term earnings. It was acceptable for many small technology companies to operate at a loss for a year or more, because these companies, investors hoped, would achieve long term future earnings.
As investors believed these long term substantial earnings would translate into high eventual EPS, they continued to purchase the stocks, driving up the stock prices.
For many companies, this did not happen. What matters most to an investor is what will happen in the near future. To clarify how this works, consider the following ratios and what they mean. Keep in mind that these are only a few of the major ratios, and that literally hundreds of financial and accounting ratios have been invented to compare dissimilar companies. Consider the following example. However, the true measure of cheapness vs.
Importantly, the distinguishing factor is the anticipated growth in earnings per share. Company B is growing faster—at a 20 percent rate—and therefore justifies the 20 times earnings stock price. In this example, one could argue that both companies are priced similarly both have PEG ratios of 1.
Roughly speaking, the average company has a PEG ratio of or 1 i. Depreciation and amortization are added back, as they are not actual cash-based costs. Vault Career Guide to Investment Banking The Equity Markets taxes are paid only if a company is profitable after it has paid for everything else. Interest is added back too, as it is paid on existing debt, for which the cash flow could potentially be used to do other things.
Note: For a more detailed explanation of this and other financial calculations, see the Vault Guide to Finance Interviews. Adding together depreciation and amortization to operating earnings, a common subtotal on the income statement, can serve as a shortcut to calculating EBITDA. To compute market value of equity, simply multiply the current stock price times the number of shares outstanding. Sometimes it is called the price-sales ratio though this technically is not correct.
Why use this ratio? For one, many firms not only have negative earnings, but also negative cash flow. Specifically one calculates this ratio by dividing EV by the last 12 months revenue figure. ROE is an important measure, especially for financial services companies, which evaluates the return on income that a firm earned in any given year. Return on equity is expressed as a percentage.
The vast majority of stock traded in the markets today is common. Common stock enables investors to vote on company matters. Convertible preferred stock: This is a relatively uncommon type of equity issued by a company, often when it cannot successfully sell either straight common stock or straight debt. Convertible preferred stock usually pays dividends in a manner similar to the way a bond pays coupon payments.
However, preferred stock ultimately converts to common stock after a period of time. Preferred stock can be viewed as a mix of debt and equity, and is most often used as a way for a risky company to obtain capital when neither debt nor equity works.
In terms of its relative priority on the claim of the assets of a company in the event of a bankruptcy, preferred stock is higher on the food chain than common stock. Non-convertible preferred stock: Sometimes companies usually those with steady and predictable earnings issue non-convertible preferred stock that pays steady dividends.
This stock remains outstanding in perpetuity and trades similar to bonds. Utilities represent the best example of non-convertible preferred stock issuers. Value Stocks, Growth Stocks and Momentum Investors It is important to know that investors typically classify stocks into one of two categories — growth and value stocks. Momentum investors buy a subset of the stocks in the growth category.
Value stocks are those that often have been battered by investors. Investors choose value stocks with the hope that their businesses will turn around and profits will return. Growth stocks are just the opposite. Momentum investors buy growth stocks that have exhibited strong upward price appreciation.
Thus, a stock run-up by momentum investors can potentially crash dramatically as investors bail out at the first sign of trouble. From credit cards to small business loans to multi- billion dollar bond issuances, debt is an integral part of the financial markets. Most everyone in the world has access to some form of debt.
Although it normally has a negative connotation, debt is also the most common way for a company to raise capital. Most companies are simply too small or do not want to have public equity and be traded in the stock markets. Therefore, they opt for loans, bonds, or another form of debt to fill their day-to-day funding needs. For the average person, the debt markets are not as visible, nor as easy to understand as the equity market.
In fact, despite this low profile, the debt markets are substantially larger than the equity markets. Even the bond market, which is just a subset of the overall debt market, is larger than the equity market.
However, in the past decade, as the syndicated loan market has grown and evolved, the debt markets have become both fixed and floating income markets. However, be aware that both the loan and bond markets including securitizations comprise the vast majority of the debt markets. What is the Bond Market? Until the late s and early 80s, bonds were considered not very attractive investments, bought by retired grandparents, retirement funds, and insurance companies.
They traded infrequently, and provided safe, steady returns. With the development of mortgage-backed securities, Salomon Brothers also contributed to the bond market evolution, transforming bonds into something exciting and extremely profitable for investment banks.
A primary measure of importance to fixed income investors is the yield curve. To construct a simple yield curve, investors typically look at the yield on a day U. T-bill and then the yield on the year U. The LGC index measures the returns on mostly government securities, but also blends in a portion of corporate bonds. The index is adjusted periodically to reflect the percentage of assets in government and in corporate bonds in the market.
Mortgage bonds are excluded entirely from the LGC index. These bonds are the most reliable in the world, as the U. However, if it ever did default, the world financial markets would essentially be in shambles. Because they are virtually risk-free, U.
Government Treasury security. Treasury bond of the same time to maturity. For instance, an investor investigating the year Acme Corp. Treasury bond that has 20 years remaining until maturity. Because U. The riskier a bond, the larger the spread: low-risk bonds trade at a small spread to Treasuries, while below-investment grade bonds trade at tremendous spreads to Treasuries.
Investors refer to company specific risk as credit risk. Triple A ratings represents the highest possible corporate bond designation, and are reserved for the best-managed, largest blue-chip companies.
Triple A bonds trade at a yield close to the yield on a risk-free government Treasury. Companies continue to be monitored by the rating agencies as long as their bonds trade in the markets. The following table summarizes rating symbols of the two major rating agencies and provides a brief definition of each. In short, interest rates. The general level of interest rates, as measured by many different barometers see inset moves bond prices up and down, in dramatic inverse fashion.
In other words, if interest rates rise, the bond markets suffer. Think of it this way. Say you own a bond that is paying you a fixed rate of 8 percent today, and that this rate represents a 1.
An increase in rates of 1 percent means that this same bond purchased now as opposed to when you purchased the bond will now yield 9 percent. And as the yield goes up, the price declines.
So, your bond loses value and you are only earning 8 percent when the rest of the market is earning 9 percent. You could have waited, purchased the bond after the rate increase, and earned a greater yield. The opposite occurs when rates go down. If you lock in a fixed rate of 8 percent and rates plunge by 1 percent, you now earn more than those who purchase the bond after the rate decrease. Therefore, as interest rates change the price or value of bonds will rise or fall so that all comparable bonds will trade at the same yield regardless of when or at what interest rate these bonds were issued.
Interest rates react mostly to inflation expectations expectations of a rise in prices. If it is believed that inflation will rise, then interest rates rise. Say inflation is 5 percent a year.
In order to make money on a loan, a bank would have to at least charge more than 5 percent—otherwise it would essentially be losing money on the loan. The same is true with bonds and other fixed income products. In the late s, interest rates topped 20 percent, as inflation began to spiral out of control and the market expected continued high inflation. Today, many believe that the Federal Reserve has successfully slayed inflation and has all but eliminated market concerns of this amount of future inflation, at least in the near term.
This is certainly debatable, but clearly, the sound monetary policies and remarkable price stability in the U. Investment banking professionals often discuss interest rates in general terms. But what are they really talking about? So many rates are tossed about that they may be difficult to track. To clarify, we will take a brief look at the key rates worth tracking. We have ranked them in typically ascending order: the discount rate usually is the lowest rate; the yield on junk bonds is usually the highest.
The discount rate: The discount rate is the rate that the Federal Reserve charges on overnight loans to banks. Today, the discount rate can be directly changed by the Fed, but maintains a largely symbolic role. Federal funds rate: The rate domestic banks charge one another on overnight loans to meet Federal Reserve requirements. This rate is also directly controlled by the Fed and is a critical interest rate to financial markets.
T-Bill yields: The yield or internal rate of return an investor would receive at any given moment on a to day Treasury bill. Often used by banks to quote floating rate loan interest rates.
Treasury bond. Municipal bond yields: The yield or internal rate of return an investor would receive at any given moment by investing in municipal bonds.
We should note that the interest on municipal bonds typically is free from federal government taxes and therefore has a lower yield than other bonds of similar risk. These yields, however, can vary substantially depending on their rating, so could be higher or lower than presented here. High grade corporate bond yield: The yield or internal rate of return an investor would receive by purchasing a corporate bond with a rating above BB.
Prime rate: The average rate that U. Mortgage rates typically move in line with the yield on the year Treasury note. High yield bonds: The yield or internal rate of return an investor would receive by purchasing a corporate bond with a rating below BBB also called junk bonds. Therefore, if the Fed allows the money supply to increase by 2 percent this year, inflation can best be predicted to increase by about 2 percent as well.
Because inflation so dramatically impacts the stock and bond markets, the markets scrutinize the daily activities of the Fed and hang onto every word uttered by Bernanke.
The chain of events when the Fed raises rates is as follows: The Fed raises interest rates. This interest rate increase triggers banks to raise interest rates, which leads to consumers and businesses borrowing less and spending less. This decrease in consumption tends to slow down GDP, thereby reducing earnings at companies. Since consumers and businesses borrow less, they have left their money in the bank and hence the money supply does not expand.
Note also that since companies tend to borrow less when rates go up, they therefore typically invest less in capital equipment, which discourages productivity gains and hurts earnings of capital goods providers. Any economist will tell you that a key to a growing economy on a per capita basis is improving labor productivity. Vault Career Guide to Investment Banking Fixed Income Markets Fixed Income Definitions The following glossary may be useful for defining securities that trade in the markets as well as talking about the factors that influence them.
Note that this is just a list of the most common types of fixed income products and economic indicators. Thousands of fixed income products actually trade in the markets. Types of Securities Treasury securities United States government-issued securities. Categorized as Treasury bills maturity of up to— but not including—two years , Treasury notes from two years to 10 years maturity , and Treasury bonds 10 years to 30 years.
Treasuries have no default risk, but do have interest rate risk—if rates increase, then the price of US Treasuries issued in the past will decrease. Agency bonds Agencies represent all bonds issued by the federal government and federal agencies, but excluding those issued by the Treasury i. Typically big, blue-chip companies issue highly rated bonds.
Typically smaller, riskier companies issue high yield bonds. Municipal bonds Bonds issued by local and state governments, a. Sometimes investors are exempt from state and local taxes too.
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