Interview Questions: Finance Interview Brainteasers

Perhaps even more so than tough finance questions, brainteasers can unnerve the most icy-veined,
well-prepared finance candidate. Even if you know the relationships between inflation, bond prices
and interest rates like the back of a dollar bill, all your studying may not help you when your
interviewer asks you how many ping pong balls fit in a 747.
hat is partly their purpose. !nvestment bankers and other finance professionals need to be able to
work well under pressure, so many interviewers believe that throwing a brainteaser at a candidate is
a good way to test an applicant"s battle-worthiness. #ut these questions serve another purpose, too -
interviewers want you to showcase your ability to analy$e a situation, and to form conclusions about
this situation. !t is not usually important that you come up with a %correct% answer, &ust that you
display strong analytical ability.
'emember, brainteasers are very unstructured, so it is tough to suggest a step-by-step
methodology. here are a couple of set rules, though. (irst, take notes as your interviewer gives you
a brainteaser, especially if it"s heavy on the math. )econd, think aloud so your interviewer can hear
your thought process. *ere are some samples+
1. If you look at a clock and the time is 3:15, what is the angle between the hour and the minute
hands?
he answer to this is not $ero, he hour hand, remember, moves as well. he hour hand moves a
quarter of the way between three and four, so it moves a quarter of a twelfth -./401 of 234 degrees.
)o the answer is seven and a half degrees, to be e5act.
2. You have a five-gallon ug and a three-gallon ug! You must obtain e"actly four gallons of water!
#ow will you do it?
6ou should find this brainteaser fairly simple. !f you were to think out loud, you might begin by
e5amining the ways in which combinations of five and three can come up to be four. (or e5ample+ -7
- 21 8 -7 - 21 9 4. his path does not actually lead to the right answer, but it is a fruitful way to begin
thinking about the question. *ere"s the solution+ fill the three-gallon &ug with water and pour it into the
five-gallon &ug. 'epeat. #ecause you can only put two more gallons into the five-gallon &ug, one
gallon will be left over in the three-gallon &ug. Empty out the five-gallon &ug and pour in the one
gallon. :ow &ust fill the three-gallon &ug again and pour it into the five-gallon &ug. a-da.
-;athematically, this can be represented 2 8 2 - 7 8 2 9 41
3. You are faced with two doors! $ne door leads to your ob offer %that&s the one you want'(, and the
other leads to the e"it! In front of each door is a guard! $ne guard always tells the truth! )he other
always lies! You can ask one *uestion to decide which door is the correct one! +hat will you ask?
he way to logically attack this question is to ask how you can construct a question that provides the
same answer -either a true statement or a lie1, no matter who you ask.
here are two simple answers. <sk a guard+ %!f ! were to ask you if this door were the correct one,
what would you say=% he truthful consultant would answer yes -if it"s the correct one1, or no -if it"s
not1. :ow take the lying consultant. !f you asked the liar if the correct door is the right way, he would
answer no. #ut if you ask him+ %!f ! were to ask you if this door were the correct one, what would you
say,% he would be forced to lie about how he would answer, and say yes. <lternately, ask a guard+ %!f
! were to ask the other guard which way is correct, what would he say=% *ere, the truthful guard
would tell you the wrong way -because he is truthfully reporting what the liar would say1, while the
lying guard would also tell you the wrong way -because he is lying about what the truthful guard
would say1.
!f you want to think of this question more mathematically, think of lying as represented by -., and
telling the truth as represented by 8.. he first solution provides you with a consistently truthful
answer because --.1--.1 9 ., while -.1-.1 9 .. he second solution provides you with a consistently
false answer because -.1--.1 9 -., and --.1-.1 9 -..
VAULT
1. How many gallons of white house paint are sold in the U.S. every year?
THE "STAT BI!" A""#A$H: !f you"re not sure where to begin, start with the basic assumption
that there are >74 million people in the ?.). -or >7 million businesses, depending on the question1. !f
there are >74 million people in the ?nited )tates, perhaps half of them live in houses -or .27 million
people1. he average family si$e is about three people, so there would be 47 million houses in the
?nited )tates. @et"s add another .4 percent to that for second houses and houses used for other
purposes besides residential. )o there are about 74 million houses.
!f houses are painted every .4 years, on average -notice how we deftly make that number easy to
work with1, then there are 7 million houses painted every year. <ssuming that one gallon of paint
covers .44 square feet of wall, and that the average house has >,444 square feet of wall to cover,
then each house needs >4 gallons of paint. )o .44 million gallons of paint are sold per year -7
million houses 5 >4 gallons1. -:ote+ !f you want to be fancy, you can ask your interviewer whether
you should include inner walls as well,1 !f 04 percent of all houses are white, then 04 million gallons
of white house paint are sold each year. -Aon"t forget that last step,1
-more of this guesstimate on the ne5t page1
THE "STAT S%ALL" A""#A$H: 6ou could also start small, and take a town of >7,444 -about
./.4,444 of the population1. !f you use the same assumption that half the town lives in houses in
groups of three, then there are 4,744 houses, plus another .4 percent, then there are really 7,444
houses to worry about. Painted every .4 years, 744 houses are being painted in any given year. !f
each house has >,444 square feet of wall, and each gallon of paint covers .44 square feet, then
each house needs >4 gallons - and so .4,444 gallons of house paint are sold each year in your
typical town. Perhaps 0,444 of those are white. ;ultiply by .4,444 - you have 04 million gallons.
6our interviewer may then ask you how you would actually get that number, on the &ob, if necessary.
?se your creativity - contacting ma&or paint producers would be smart, putting in a call to *?A"s
statistics arm could help, or even conducting a small sample of the second calculation in a few
representative towns is possible.
2. What is the size of the market for disposable diapers in hina?
*ere"s a good e5ample of a market si$ing. *ow many people live in Bhina= < billion. #ecause the
population of Bhina is young, a full 344 million of those inhabitants might be of child-bearing age.
*alf are women, so there are about 244 million Bhinese women of childbearing age. :ow, the
average family si$e in Bhina is restricted, so it might be ..7 children, on average, per family. @et"s
say two-thirds of Bhinese women have children. hat means that there are about >44 million
children in Bhina. *ow many of those kids are under the age of two= <bout a tenth, or >4 million. )o
there are at least >4 million possible consumers of disposable diapers.
To su&&ari'e:
. billion people 5 34C childbearing age 9 344,444,444 people
344,444,444 people 5 ./> are women 9 244,444,444 women of childbearing age
244,444,444 women 5 >/2 have children 9 >44,444,444 women with children
>44,444,444 women 5 ..7 children each 9 244,444,444 children
244,444,444 children 5 ./.4 under age > 9 24 million
!. How many s"uare feet of pizza are eaten in the United States ea#h month?
ake your figure of 244 million people in <merica. *ow many people eat pi$$a= @et"s say >44
million. :ow let"s say the average pi$$a-eating person eats pi$$a twice a month, and eats two slices
at a time. hat"s four slices a month. !f the average slice of pi$$a is perhaps si5 inches at the base
and .4 inches long, then the slice is 24 square inches of pi$$a. )o four pi$$a slices would be .>4
square inches. herefore, there are a billion square feet of pi$$a eaten every month.
To su&&ari'e:
244 million people in <merica
>44 million eat pi$$a
<verage slice of pi$$a is si5 inches at the base and .4 inches long 9 24 square inches -height 5 half
the base1
<verage <merican eats four slices of pi$$a a month
(our pieces 5 24 square inches 9 .>4 square inches -one square foot is .44 inches1, so let"s
assume one square foot per person
>44 million square feet a month
$. How would you estimate the weight of the hrysler building?
his is a process guesstimate - the interviewer wants to know if you know what questions to ask.
(irst, you would find out the dimensions of the building -height, weight, depth1. his will allow you to
determine the volume of the building. Aoes it taper at the top= -6es.1 hen, you need to estimate the
composition of the Bhrysler building. !s it mostly steel= Boncrete= *ow much would those
components weigh per square inch= 'emember the e5tra step - find out whether you"re considering
the building totally empty or with office furniture, people, etc.= -!f you"re including the contents, you
might have to add >4 percent or so to the building"s weight.1
%. Why are manhole #overs round?
he classic brainteaser, straight to you via ;icrosoft -the originator1. Even though this question has
been around for years, interviewees still encounter it.
*ere"s how to %solve% this brainteaser. 'emember to speak and reason out loud while solving this
brainteaser,
Dhy are manhole covers round= Bould there be a structural reason= Dhy aren"t manhole covers
square= !t would make it harder to fit with a cover. 6ou"d have to rotate it e5actly the right way. )o
many manhole covers are round because they don"t need to be rotated. here are no corners to deal
with. <lso, a round manhole cover won"t fall into a hole because it was rotated the wrong way, so it"s
safer.
@ooking at this, it seems corners are a problem. 6ou can"t cut yourself on a round manhole cover.
<nd because it"s round, it can be more easily transported. Ene person can roll it.
&. 'f you look at a #lo#k and the time is !(1%) what is the angle between the hourand the
minute hands?
he answer to this is not $ero, he hour hand, remember, moves as well. he hour hand moves a
quarter of the way between three and four, so it moves a quarter of a twelfth -./401 of 234 degrees.
)o the answer is seven and a half degrees, to be e5act.
*. +ou have a five,gallon -ug and a three,gallon -ug. +ou must obtain e.a#tly four gallons of
water. How will you do it?
6ou should find this brainteaser fairly simple. !f you were to think out loud, you might begin by
e5amining the ways in which combinations of five and three can come up to be four. (or e5ample+ -7
- 21 8 -7 - 21 9 4. his path does not actually lead to the right answer, but it is a fruitful way to begin
thinking about the question. *ere"s the solution+ fill the three-gallon &ug with water and pour it into the
five-gallon &ug. 'epeat. #ecause you can only put two more gallons into the five-gallon &ug, one
gallon will be left over in the three-gallon &ug. Empty out the five-gallon &ug and pour in the one
gallon. :ow &ust fill the three-gallon &ug again and pour it into the five-gallon &ug. a-da.
-;athematically, this can be represented 2 8 2 - 7 8 2 9 41
/. +ou have 12 balls. 0ll of them are identi#al e.#ept one) whi#h is either heavier or lighter
than the rest. 1he odd ball is either hollow while the rest are solid) or solid while the rest are
hollow. +ou have a s#ale) and are permitted three weighings. an you identify the odd ball)
and determine whether it is hollow or solid?
his is a pretty comple5 question, and there are actually multiple solutions. (irst, we"ll e5amine what
thought processes an interviewer is looking for, and then we"ll discuss one solution.
)tart with the simplest of observations. he number of balls you weigh against each other must be
equal. 6eah, it"s obvious, but why= #ecause if you weigh, say three balls against five, you are not
receiving any information. !n a problem like this, you are trying to receive as much information as
possible with each weighing.
(or e5ample, one of the first mistakes people make when e5amining this problem is that they believe
the first weighing should involve all of the balls -si5 against si51. his weighing involves all of the
balls, but what type of information does this give you= !t actually gives you no new information. 6ou
already know that one of the sides will be heavier than the other, and by weighing si5 against si5,
you will simply confirm this knowledge. )till, you want to gain information about as many balls as
possible -so weighing one against one is obviously not a good idea1. hus the best first weighing is
four against four.
)econdly, if you think through this problem long enough, you will reali$e how precious the
information gained from a weighing is+ 6ou need to transfer virtually every piece of information you
have gained from one weighing to the ne5t. )ay you weigh four against four, and the scale balances.
@ucky you, :ow you know that the odd ball is one of the unweighed four. #ut don"t give into the
impulse to simply work with those balls. !n this weighing, you"ve also learned that the eight balls on
the scale are normal. ry to use this information.
(inally, remember to use your creativity. ;ost people who work through this problem consider only
weighing a number of balls against each other, and then taking another set and weighing them, etc.
his won"t do. here are a number of other types of moves you can make - you can rotate the balls
from one scale to another, you can switch the balls, etc.
@et"s look at one solution+
-more of this brainteaser on ne5t page1
(or simplicity"s sake, we will refer to one side of the scale as )ide <, and the other as )ide #.
Ste( 1: Deigh four balls against four others.
ase 0( 'f) on the first weighing) the balls balan#e
!f the balls in our first weighing balance we know the odd ball is one of those not weighed, but we
don"t know whether it is heavy or light. *ow can we gain this information easily= De can weigh them
against the balls we know to be normal. )o+
Ste( 2 )*or $ase A+: Put three of the unweighed balls on the )ide <F put three balls that are
known to be normal on )ide #.
!. !f on this second weighing, the scale balances again, we know that the final
unweighed ball is the odd one.
Ste( 3a )*or $ase A+: Deigh the final unweighed ball -the odd one1 against one of the
normal balls. Dith this weighing, we determine whether the odd ball is heavy or light.
!!. !f on this second weighing, the scale tips to )ide <, we know that the odd ball is
heavy. -!f it tips to )ide #, we know the odd ball is light, but let"s proceed with the
assumption that the odd ball is heavy.1 De also know that the odd ball is one of the
group of three on )ide <.
Ste( 3, )*or $ase A+: Deigh one of the balls from the group of three against another one. !f
the scale balances, the ball from the group of three that was unweighed is the odd ball, and
is heavy. !f the scale tilts, we can identify the odd ball, because we know it is heavier than
the other. -!f the scale had tipped to )ide #, we would use the same logical process, using
the knowledge that the odd ball is light.1
ase 2( 'f the balls do not balan#e on the first weighing
!f the balls do not balance on the first weighing, we know that the odd ball is one of the eight balls
that was weighed. De also know that the group of four unweighed balls are normal, and that one of
the sides, let"s say )ide <, is heavier than the other -although we don"t know whether the odd ball is
heavy or light1.
Ste( 2 )*or $ase B+: ake three balls from the unweighed group and use them to replace
three balls on )ide < -the heavy side1. ake the three balls from )ide < and use them to
replace three balls on )ide # -which are removed from the scale1.
!. !f the scale balances, we know that one of the balls removed from the scale was
the odd one. !n this case, we know that the ball is also light. De can proceed with the
third weighing as described in step 2b from Base <.
!!. !f the scale tilts to the other side, so that )ide # is now the heavy side, we know
that one of the three balls moved from )ide < to )ide # is the odd ball, and that it is
heavy. De proceed with the third weighing as described in step 2b in Base <.
!!!. !f the scale remains the same, we know that one of the two balls on the scale that
was not shifted in our second weighing is the odd ball. De also know that the
unmoved ball from )ide < is heavier than the unmoved ball on )ide # -though we
don"t know whether the odd ball is heavy or light1.
Ste( 3 )*or $ase B+: Deigh the ball from )ide < against a normal ball. !f the scale balances,
the ball from )ide # is the odd one, and is light. !f the scale does not balance, the ball from
)ide < is the odd one, and is heavy.
-more of this brainteaser on ne5t page1
Dhew, <s you can see from this solution, one of the keys to this problem is understanding that
information can be gained about balls even if they are not being weighed. (or e5ample, if we know
that one of the balls of two groups that are being weighed is the odd ball, we know that the
unweighed balls are normal. Ence this is known, we reali$e that breaking the balls up into smaller
and smaller groups of three -usually eventually down to three balls1, is a good strategy - and an
ultimately successful one.
3. +ou are fa#ed with two doors. 4ne door leads to your -ob offer 5that6s the one you want78)
and the other leads to the e.it. 'n front of ea#h door is a guard. 4ne guard always tells the
truth. 1he other always lies. +ou #an ask one "uestion to de#ide whi#h door is the #orre#t
one. What will you ask?
he way to logically attack this question is to ask how you can construct a question that provides the
same answer -either a true statement or a lie1, no matter who you ask.
here are two simple answers. <sk a guard+ %!f ! were to ask you if this door were the correct one,
what would you say=% he truthful consultant would answer yes -if it"s the correct one1, or no -if it"s
not1. :ow take the lying consultant. !f you asked the liar if the correct door is the right way, he would
answer no. #ut if you ask him+ %!f ! were to ask you if this door were the correct one, what would you
say,% he would be forced to lie about how he would answer, and say yes. <lternately, ask a guard+ %!f
! were to ask the other guard which way is correct, what would he say=% *ere, the truthful guard
would tell you the wrong way -because he is truthfully reporting what the liar would say1, while the
lying guard would also tell you the wrong way -because he is lying about what the truthful guard
would say1.
!f you want to think of this question more mathematically, think of lying as represented by -., and
telling the truth as represented by 8.. he first solution provides you with a consistently truthful
answer because --.1--.1 9 ., while -.1-.1 9 .. he second solution provides you with a consistently
false answer because -.1--.1 9 -., and --.1-.1 9 -..
19. 0 #ompany has 19 ma#hines that produ#e gold #oins. 4ne of the ma#hines is produ#ing
#oins that are a gram light. How do you tell whi#h ma#hine is making the defe#tive #oins with
only one weighing?
hink this through - clearly, every machine will have to produce a sample coin or coins, and you
must weigh all these coins together. *ow can you somehow indicate which coins came from which
machine= he best way to do it is to have every machine crank a different number of coins, so that
machine . will make one coin, machine > will make two coins, and so on. ake all the coins, weigh
them together, and consider their weight against the total theoretical weight. !f you"re four grams
short, for e5ample, you"ll know that machine 4 is defective.
11. 1he four members of U2 52ono) the :dge) ;arry and 0dam8 need to get a#ross a narrow
bridge to play a #on#ert. Sin#e it6s dark) a flashlight is re"uired to #ross) but the band has
only one flashlight) and only two people #an #ross the bridge at a time. 51his is not to say) of
#ourse) that if one of the members of the band has #rossed the bridge) he #an6t #ome ba#k by
himself with the flashlight.8 0dam takes only a minute to get a#ross) ;arry takes two minutes)
the :dge takes five minutes) and slowpoke 2ono takes 19 minutes. 0 pair #an only go as fast
as the slowest member. 1hey have 1* minutes to get a#ross. How should they do it?
he key to attacking this question is to understand that #ono and the Edge are ma&or liabilities and
must be grouped together. !n other words, if you sent them across separately, you"d already be
using .7 minutes. his won"t do. Dhat does this mean= hat #ono and the Edge must go across
together. #ut they can not be the first pair -or one of them will have to transport the flashlight back1.
!nstead, you send @arry and <dam over first, taking two minutes. <dam comes back, taking another
minute, for a total of three minutes. #ono and the Edge then go over, taking .4 minutes, and
bringing the total to .2. @arry comes back, taking another two minutes, for a total of .7. <dam and
@arry go back over, bringing the total time to .7 minutes.
12. What is the de#imal e"uivalent of !<1& and *<1&?
< commonly-used Dall )treet interview question, this one isn"t &ust an attempt to stress you out or
see how quick your mind works. his question also has practical banking applications. )tocks often
are traded at prices reported in ./.3s of a dollar. -Each ./.3 9 .43>7, so 2/.3 9 ..077 and 7/.3 9 .
42771.
1!. What is the sum of the numbers from one to %9?
<nother question that recent analyst hires often report receiving. his is a relatively easy one+ pair
up the numbers into groups of 7. -. 8 74 9 7.F > 8 4G 9 7.F etc.1. wenty-five pairs of 7. equals
.>77.
1$. +ou have a painting that is =!29 that is selling for 29 per#ent off. How mu#h is the
dis#ounted pri#e?
Balculate quickly+ Dhat"s 04 percent of H2>4= he answer"s H>73. Even in a question like this, if you
are good with numbers and use shortcuts, don"t be afraid to talk aloud. (or e5ample+ 04 percent of
H2>4 can be broken down to a calculation like 04 percent of H04 5 H4, or .3>.
1%. +ou6re playing three,#ard monte. 1wo #ards are red) one is bla#k. 5>ote( 'n three,#ard
monte) the three #ards are fa#e down and you try to pi#k the bla#k #ard in order to win.8 +ou
pi#k the middle #ard. 0fter you pi#k) the dealer shows that one of the #ards you have not
#hosen is red. +ou are given the #han#e to swit#h your sele#tion. Should you?
he short answer is yes. #y switching, you are betting that the card you initially chose was red. #y
not switching, you are betting that the card you initially chose was black. <nd because two out of
three cards are red, of course, betting on red is the way to go.
@et"s break it down, starting with the not switching case. )ay the first card you chose was the black
one. his happens one-third of the time. !f you do not switch your choice, you win. :eedless to say,
the other two-thirds of the time, having picked a red card, and deciding not to switch, you lose. !n
other words, if you do not switch, you win a third of the time.
:ow let"s e5amine what happens when you switch cards. )ay the first card you chose was the black
one. <gain, this would happen one-third of the time. !f, after being shown a red card, you switch, you
lose. he other two-thirds of the time, if you switch, you win because the dealer has already shown
you that one of the cards you did not pick is red. Iiven the premise that your original pick was a red
card, the card you are switching to must be the black one. 6ou will win two-thirds of the time.
1&. 0 straight flush beats a four,of,a,kind in poker be#ause it is more unlikely. 2ut think
about how many straight flushes there are , if you don6t #ount wraparound straights) you #an
have a straight flush starting on any #ard from two to 19 in any suit 5nine per suit8. 1hat
means there are !& straight flushes possible. 2ut how many four of a kinds are there , only
1!. What6s wrong with this reasoning?
!mmediately, you should think about what the difference is between a straight flush and a four-of-a-
kind. Ene involves five cards, and the other involves four. !ntuitively, that"s what should strike you as
the problem with the line of reasoning. @ook closer and you"ll see what that means+ for every four of
a kind, there are actually a whole bunch of five-card hands+ 40 -7> - 41 in fact. here are actually 3>4
-40 5 .21 of them in all.
1*. 'f you have seven white so#ks and nine bla#k so#ks in a drawer) how many do you have
to pull out blindly in order to ensure that you have a mat#hing pair?
hree. @et"s see - if the first one is one color, and the second one is the other color, the third one, no
matter what the color, will make a matching pair. )ometimes you"re not supposed to think that hard.
1/. 1ell me a good -oke that is neither se.ist nor ra#ist.
!f you can"t think of any, you"re in the same boat as the unfortunately tongue-tied recent candidate at
)alomon )mith #arney. (ind one and remember it.
13. 'f ' were to fill this room with pennies) how many pennies would fit in?
< literally in-your-face guesstimate.
29. Say you are driving on a one,mile tra#k. +ou do one lap at !9 miles an hour. How fast do
you have to go to average &9 miles an hour?
his is something of a trick question, and was recently received by a Ioldman candidate. he first
thought of many people is to say G4 miles an hour, but consider+ !f you have done a lap at 24 miles
an hour, you have already taken two minutes. wo minutes is the total amount of time you would
have to take in order to average 34 miles an hour. herefore, you can not average 34 miles an hour
over the two laps.
JIuesstimates are commonly asked in consulting and investment banking interviews. Ienerally,
your interviewer asks you to estimate the number or si$e of something, and observes your reasoning
process. ;ost interviewers don"t care if you actually get the correct number - what they want to see
is that you are able to logically think through a process, creatively think through any possible
e5ceptions or short cuts, and calculate basic sums in your head. 6ou won"t be given any real data
-though you won"t need to know much more beyond the fact that the ?nited )tates has about >74
million inhabitants and >7 million businesses1, and you shouldn"t request anyF it"s irrelevant to the
problem at hand. ;ake reasonable assumptions, with easy-to-work-with numbers, and go from there
-remember that you"re e5pected to use a pen and notepad to work through your calculations1. hese
guesstimates may also involve elements of creativity and problem solving. (or e5ample, when posed
the question %*ow much change would you find on the floor of a mall=% you might want to ask %!s
there a fountain in the mall=%
Sa&(-e .uessti&ate:
1. How &an/ .a--ons o* w0ite 0ouse(aint are so-1 in t0e U.S. eac0 /ear2
*E %)<' #!I% <PP'E<B*+ !f you"re not sure where to begin, start with the basic assumption
that there are >74 million people in the ?.). -or >7 million businesses, depending on the question1. !f
there are >74 million people in the ?nited )tates, perhaps half of them live in houses -or .27 million
people1. he average family si$e is about 2, so there would be 47 million houses in the ?nited
)tates. @et"s add another .4 percent to that for second houses and houses used for other purposes
besides residential. )o there are about 74 million houses.
!f houses are painted every .4 years on average -notice how we deftly make that number easy to
work with1, then there are 7 million houses painted every year. <ssuming that one gallon of paint
covers .44 square feet of wall, and that the average house has >444 square feet of wall to cover,
then each house needs >4 gallons of paint. )o .44 million gallons of paint are sold per year -7
million houses 5 >4 gallons1. -:ote+ !f you want to be fancy, you can ask your interviewer whether
you should include inner walls as well,1 !f 04 percent of all houses are white, then 04 million gallons
of white housepaint are sold each year. -Aon"t forget that last step,1
*E %)<' );<@@% <PP'E<B*+ 6ou could also start small, and take a town of >7,444 -about
one ten thousandth of the population1. !f you use the same assumption that half the town lives in
houses in groups of three, then there are 4,744 houses, plus another .4 percent, then there are
really 7,444 houses to worry about. Painted every .4 years, 744 houses are being painted in any
given year. !f each house has >,444 square feet of wall, and each gallon of paint covers .44 square
feet, then each house needs >4 gallons - and so .4,444 gallons of housepaint are sold each year in
your typical town. Perhaps 0,444 of those are white. ;ultiply by .4,444 - you have 04 million gallons.
6our interviewer may then ask you how you would actually get that number, on the &ob, if necessary.
?se your creativity - contacting ma&or paint producers would be smart, putting in a call to *?AKs
statistics arm could help, or even conducting a small sample of the second calculation in a few
representative towns is possible.
Ether guesstimates+
.. *ow much orange &uice is consumed each day in <merica=
>. *ow many golf balls would fit into a 747=
2. *ow many grocery stores are there in the ?.).=
4. DhatKs the si$e of
)tock !nterview Luestions
1. What kind of sto#ks would you issue for a startup?
< startup typically has more risk than a well-established firm. he kind of stocks that one would issue
for a startup would be those that protect the downside of equity holders while giving them upside.
*ence the stock issued may be a combination of common stock, preferred stock and debt notes with
warrants -options to buy stock1.
2. When should a #ompany buy ba#k sto#k?
Dhen it believes the stock is undervalued and believes it can make money by investing in itself. his
can happen in a variety of situations. (or e5ample, if a company has suffered some decreased
earnings because of an inherently cyclical industry -such as the semiconductor industry1, and
believes its stock price is un&ustifiably low, it will buy back its own stock. En other occasions, a
company will buy back its stock if investors are driving down the price precipitously. !n this situation,
the company is attempting to send a signal to the market that it is optimistic that its falling stock price
is not &ustified. !t"s saying+ %De know more than anyone else about our company. De are buying our
stock back. Ao you really think our stock price should be this low=%
!. 's the dividend paid on #ommon sto#k ta.able to shareholders? ?referred sto#k? 's it ta.
dedu#tible for the #ompany?
he dividend paid on common stock is ta5able on two levels in the ?.). (irst at the firm level, as a
dividend comes out from the net income after ta5es -i.e., the money has been ta5ed once already1
and then at the shareholder level. he shareholders are ta5ed for the dividend as ordinary income
-E.!.1. Aividend for preferred stock is treated as an interest e5pense and is ta5-free at the corporate
level.
$. When should a #ompany issue sto#k rather than debt to fund its operations?
here are several reasons for a company to issue stock rather than debt. he first is if it believes its
stock price is inflated, and it can raise money -on very good terms1 by issuing stock. he second is
when the pro&ects for which the money is being raised may not generate predictable cash flows in
the immediate future. < simple e5ample of this is a startup company. he owners of startups
generally will issue stock rather than take on debt because their ventures will probably not generate
predictable cash flows, which is needed to make regular debt payments, and also so that the risk of
the venture is diffused among the company"s shareholders. < third reason for a company to raise
money by selling equity is if it wants to change its debt-to-equity ratio. his ratio in part determines a
company"s bond rating. !f a company"s bond rating is poor because it is struggling with large debts,
they may decide to issue equity to pay down the debt.
%. Why would an investor buy preferred sto#k?
-..1 <n investor that wants the upside potential of equity but wants to minimi$e risk would buy
preferred stock. he investor would receive steady interest-like payments -dividends1 from the
preferred stock that are more assured than the dividends from common stock. ->.1 he preferred
stock owner gets a superior right to the company"s assets should the company go bankrupt. -2.1 <
corporation would invest in preferred stock because the dividends on preferred stock are ta5ed at a
lower rate than the interest rates on bonds.
&. Why would a #ompany distribute its earnings through dividends to #ommon sto#kholders?
'egular dividend payments are signals that a company is healthy and profitable. <lso, issuing
dividends can attract investors -shareholders1. (inally, a company may distribute earnings to
shareholders if it lacks profitable investment opportunities.
*.What sto#ks do you like?
his is a question often asked of those applying for equity research positions. -<pplicants for
investment banking and trading positions, as well as investment management positions have also
reported receiving this question.1 !f you"re interviewing for one of these positions, you should prepare
to talk about a couple of stocks you believe are good buys and some that you don"t. his is also a
question asked of undergraduate finance candidates to gauge their level of interest in finance.
/. What did the S@? %99 #lose at yesterday?
<nother question designed to make sure that a candidate is sincerely interested in finance. his
question -and others like it - %Dhat"s the Aow at now=% %Dhat"s the yield on the @ong #ond=%1 can be
e5pected especially of those looking for sales and trading positions.
3. Why did the sto#k pri#e of A+B #ompany de#rease yesterday when it announ#ed in#reased
"uarterly earnings?
< couple of possible e5planations+ .1 the entire market was down, -or the sector to which M6N
belongs was down1, or >1 even though M6N announced increased earnings, the )treet was
e5pecting earnings to increase even higher.
19. an you tell me about a re#ent '?4 that you have followed?
'ead )he +all ,treet -ournal and stay current with recent offerings.
11. What is your investing strategy?
Aifferent investors have different strategies. )ome look for undervalued stocks, others for stocks
with growth potential and yet others for stocks with steady performance. < strategy could also be
focused on the long-term or short-term, and be more risky or less risky. Dhatever your investing
strategy is, you should be able to articulate these attributes.
12. How has your portfolio performed in the last five years?
!f you are applying for an investment management firm as an ;#<, you"d better have a good answer
for this one. <lso, if you think you are going to say it has outperformed the )OP each year, you
better be well prepared to e5plain why you think this happened.
1!. 'f you read that a given mutual fund has given %9C returns last year) would you invest in
it?
6ou should look for more information, as past performance is not necessarily an indicator of future
results. *ow has the overall market done= *ow did it do in the years before= Dhy did it give 74C
returns last year= Ban that strategy be e5pected to work continuously over the ne5t five to .4 years=
6ou need to look for answers to these questions before making a decision.
1$. ou are in the board of dire#tors of a #ompany and own a signifi#ant #hunk of the
#ompany. 1he :4) in his annual presentation states that the #ompany6s sto#k is doing as it
has gone up 29C in the last 12 months. 's the #ompany6s sto#k doing well?
<nother %trick% stock question that you should not answer too quickly. (irst, ask what the #eta of the
company is. -'emember, the #eta represents the volatility of the stock with respect to the market.1 !f
the #eta is . and the market -i.e. the Aow Pones !ndustrial <verage1 has gone up 27C, the company
actually has not done too well in the stock market.
1%. What is your 2eta?
Aon"t be too surprised if an interviewer asks you this question. *e/she could be doing this to throw
you off guard, ake it in the spirit and reply based on how %risky% you think you are,
1&. What do you think is happening with 02 sto#k?
E5pect to be asked this question if you say you like to follow the !nternet sector or the
pharmaceutical sector. !nterviewers will test you to see how well you know your industry. !n case you
don"t know that stock, admit it, and offer to describe a stock in that sector that you like or have been
following.
1*. Where do you think the DE'0 will be in three months and si. months , and why?
:obody knows the answer to this one. *owever, you should at least have some thoughts on the
sub&ect and be able to articulate why you think this is the case. !f you have been following the
performance of ma&or macroeconomic indicators -which will be reviewed in the ne5t section1, you
can state your case well.
1/. Why do some sto#ks rise so mu#h on the first day of trading and others don6t? How is
that Fmoney left on the table?F
#y %money left on the table,% bankers mean that the company could have successfully completed the
offering at a higher price, and that the difference in valuation thus goes to initial investors rather than
the company. Dhy this happens and when it will happen is not easy to predict from responses
received from investors during roadshows. ;oreover, if the stock rises a lot the first day it is good
publicity for the firm. #ut in many ways it is money left on the table because the company could have
sold the same stock in its initial public offering at a higher price. *owever, bankers must honestly
value a company and its stock over the long-term, rather than simply trying to guess what the market
will do. Even if a stock trades up significantly initially, a banker looking at the long-term would e5pect
the stock to come down, as long as the market eventually correctly values it.
13. What is insider trading and why is it illegal?
?ndergraduates may get this question as feelers of their business knowledge. !nsider trading
describes the illegal activity of buying or selling stock based on information that is not public
information. his is to prevent those with privileged information -company e5ecs, !-bankers and
lawyers1 from using this information to make a tremendous amount of money unfairly.
29. Who is a more senior #reditor) a bondholder or sto#kholder?
he bondholder is always more senior. )tockholders -including those who own preferred stock1 must
wait until bondholders are paid during a bankruptcy before claiming company assets.
Bon1s an1 interest rates
1. How are bonds pri#ed?
#onds are priced based on the net present value of all future cash flows e5pected from the bond.
2. How would you value a perpetual bond that pays you =1)999 a year in #oupons?
Aivide the coupon by the current interest rate. (or e5ample, a corporate bond with an interest rate of
.4C that pays H.,444 a year in coupons would be worth H.4,444.
!. When should a #ompany issue debt instead of issuing e"uity?
(irst, a company needs a steady cash flow before it can consider issuing debt -otherwise, it can
quickly fall behind interest payments and eventually see its assets sei$ed1. Ence a company can
issue debt, it will do so for a couple of main reasons.
!f the e5pected return on equity is higher than the e5pected return on debt, a company will issue
debt. (or e5ample, say a company believes that pro&ects completed with the H. million raised
through either an equity or debt offering will increase its market value from H4 million to H.4 million.
!t also knows that the same amount could be raised by issuing a H. million bond that requires
H244,444 in interest payments over its life. !f the company issues equity, it will have to sell >4C of
the company -H. million / H4 million1. his would then grow to >4C of H.4 million, or H> million. hus,
issuing the equity will cost the company H. million -H> million - H. million1. he debt, on the other
hand, will only cost H244,444. he company will therefore choose to issue debt in this case, as the
debt is %cheaper% than the equity.
<lso, interest payments on bonds are ta5 deductible. < company may also wish to issue debt if it has
ta5able income and can benefit from ta5 shields.
$. What ma-or fa#tors affe#t the yield on a #orporate bond?
he short answer+ -.1 interest rates on comparable ?.). reasury bonds, and ->1 the company"s
credit risk. < more elaborate answer would include a discussion of the fact that corporate bond
yields trade at a premium, or %spread,% over the interest rate on comparable ?.). reasury bonds.
-(or e5ample, a five-year corporate bond that trades at a premium of 4.7C, or %74 basis points,% over
the five-year reasury note is priced at %74 over.%1 *ow large this %spread% is depends on the
company"s credit risk+ the riskier the company, the higher the interest rate the company must pay to
convince investors to lend it money and, therefore, the wider the spread over ?.). reasuries.
% 'f you believe interest rates will fall) whi#h should you buy( a 19,year #oupon bond or a 19,
year zero #oupon bond?
he .4-year $ero coupon bond. < $ero coupon bond is more sensitive to changes in interest rates
than an equivalent coupon bond, so its price will increase more if interest rates fall.
&. Whi#h is riskier( a !9,year #oupon bond or a !9,year zero #oupon bond?
< 24-year $ero coupon bond. *ere"s why+ < coupon bond pays interest semi-annually, then pays the
principal when the bond matures -after 24 years, in this case1. < $ero coupon bond pays no interest,
but pays one lump sum upon maturity -after 24 years, in this case1. he coupon bond is less risky
because you receive some of your money back before over time, whereas with a $ero coupon bond
you must wait 24 years to receive any money back. -<nother answer+ he $ero coupon bond is more
risky because its price is more sensitive to changes in interest rates.1
*. What is 1he ;ong 2ond trading at?
he @ong #ond is the ?.). reasury"s 24-year bond. !n particular for sales O trading positions, but
also for corporate finance positions, interviewers want to see that you"re interested in the financial
markets and follow them daily. !f the price of the .4-year reasury note rises, does the note"s yield
rise, fall or stay the same=
/. 2ond yields move in the opposite dire#tion of bond pri#es.
herefore, if the price of a .4-year note rises, its yield will fall.
3 'f you believe interest rates will fall) should you buy bonds or sell bonds?
)ince bond prices rise when interest rates fall, you should buy bonds. 1.! #ow many /basis 0oints/
e*ual ? 0ercent?
#ond yields are measured in %basis points,% which are ./.44 of .C. .C 9 .44 basis points.
herefore, = percent 9 74 basis points.
11. 30/ can in*-ation 0urt cre1itors2
hink of it this way+ !f you are a creditor lending out money at a fi5ed rate, inflation cuts into the
percentage that you are actually making. !f you lend out money at 7C a year, and inflation is 7C,
you are only really clearing >C.
12. How would the following affe#t the interest rates? U.S. bombers atta#k 'ra" 5again8. 1he
?resident is impea#hed and #onvi#ted.
Dhile it can"t be said for certain, chances are that these kind of events will lead to fears that the
economy will go into recession, so the (ed would want to balance that by giving e5pansionary
signals and lowering interest rates.
1!. What does the government do when there is a fear of hyperinflation?
he government has fiscal and monetary policies it can use in order to control hyperinflation. he
monetary policies -the (ed"s use of interest rates, reserve requirements, etc.1 are discussed in detail
in this chapter. he fiscal policies include the use of ta5ation and government spending to regulate
the aggregate level of economic activity. !ncreasing ta5es and decreasing government spending
slows down growth in the economy and fights inflationary fears.
1$. Where do you think the U.S. e#onomy will go over the ne.t year?
alking about the ?.). economy encompasses a lot of topics+ the stock market, consumer spending,
unemployment, etc. ?nderlying all these topics are the way interest rates, inflation, and bonds
interact. ;ake sure you can speak articulately about the concepts discussed in this chapter as they
relate to the current situation.
1%. How would you value a perpetual zero #oupon bond?
he value will be $ero. < $ero coupon doesn"t pay any coupons, and if that continues on perpetually,
when do you get paid= :ever - so it ain"t worth nothing,
1&. ;et6s say a report released today showed that inflation last month was very low. However)
bond pri#es #losed lower. Why might this happen?
#ond prices are based on e5pectations of future inflation. !n this case, you can assume that traders
e5pect future inflation to be higher -regardless of the report on last month"s inflation figures1 and
therefore they bid bond prices down today. -< report which showed that inflation last month was
benign would benefit bond prices only to the e5tent that traders believed it was an indication of low
future inflation as well.1
1*. 'f the sto#k market falls) what would you e.pe#t to happen to bond pri#es) and interest
rates?
#ond prices increase and interest rates fall.
1/. 'f unemployment is low) what happens to inflation) interest rates) and bond pri#es?
!nflation goes up, interest rates also increase, and bond prices decrease.
B#45 6IEL5 7 I4TEEST "AI5
B#45 "I$E
8as (rice rises9 /ie-1 .oes 1own
5erivatives Questions
1. When would you write a #all option on Disney sto#k?
Dhen you e5pect the price of Aisney stock to fall -or stay the same1. #ecause a call option on a
stock is a bet that the value of the stock will increase, you would be willing to %write% -sell1 a call
option on Aisney stock to an investor if you believed Aisney stock would not rise. -!n this case, the
profit you would make would be equal to the option premium you received when you sold the
option.1
2. :.plain how a swap works.
< swap is an e5change of future cash flows. he most popular forms include foreign e5change
swaps and interest rate swaps. hey are used to hedge volatile rates, such as currency e5change
rates or interest rates.
!. Say ' hold a put option on 0mazon.#om sto#k with an e.er#ise pri#e of =2%9) the e.piration
date is today) and 0mazon is trading at =229. 0bout how mu#h is my put worth) and why?
6our put is worth about H24, because today, you can sell a share of stock for H>74, and buy it for
H>>4. -!f the e5piration date were in the future, the option would be more valuable, because the
stock could conceivably drop more.1
$. When would a trader seeking profit from a long,term possession of a future be in the Flong
positionF?
he trader in the long position is committed to buying a commodity on a delivery date. )he would
hold this position if she believes the commodity price will increase.
%. 0ll else being e"ual) whi#h would be less valuable( a De#ember put option on 0mazon.#om
sto#k or a De#ember put option on 2ell 0tlanti# sto#k?
he put option on #ell <tlantic should be less valuable. <ma$on.com is a more volatile stock, and
the more volatile the underlying asset, the more valuable the option.
&. 0ll else being e"ual) whi#h would be more valuable( a De#ember #all option for e2ay or a
Eanuary #all option for e2ay?
he Panuary option+ he later an option"s e5piration date, the more valuable the option.
*. Why do interest rates matter when figuring the pri#e of options?
#ecause of the ever-important concept of net present value, higher interest rates lower the value of
options.
/. 'f the strike pri#e on a put option is below the #urrent pri#e) is the option holder at the
money) in the money or out of the money?
#ecause a put option gives the holder the right to sell a security at a certain price, the fact that the
strike -or e5ercise1 price is below the current price would mean that the option holder would lose
money. ranslate that knowledge into option lingo, and you know that the option holder is %out of the
money.%
3. 'f the #urrent pri#e of a sto#k is above the strike pri#e of a #all option) is the option holder
at the money) in the money) or out of the money?
#ecause a call option gives the holder the right to buy a security, the holder in this scenario is %in the
money% -making money1.
19. When would you buy a put option on General Hills sto#k?
#ecause buying a put option gives you the option to sell the stock at a certain price, you would do
this if you e5pect the price of Ieneral ;ills stock to fall.
1: T0in.s T0e/ Hate A,out 6ou
,/ Anita ;a(a1ia
!nvestment banking interviews are starting up and soon there will be scores of disappointed
candidates who didn"t get an offer from the bulge-bracket bank of their choice. he reasons might
not always be clear, and sometimes it"s &ust a matter of numbers -- they only have so many spots
and too many qualified candidates. #ut sometimes, a mistake made in your interview can be the
difference.
!nvestment banks move fast. hey are especially aggressive in pursuit of the candidates they want.
!nterviewers often congregate at the end of the %)uper )aturday% to discuss and rank candidates.
Effers and re&ections are often e5tended within a day or two. he decisions are made rapidly, often
on the basis of one or two interviewers" opinions. *owever, when you get a call from the firm, don"t
e5pect a detailed summary of the reasons for your re&ection. %De"re not able to make you an offer,%
may be the e5tent of the e5planation from the investment banker who has the unfortunate task of
turning you down.
)o why did you get turned down= Qault spoke with some investment bankers to get a sense of the
main factors that cause !-banks to turn down candidates. he result of our discussions is the
following list of the .4 most common reasons for re&ection. !f you"re still interviewing, you might want
to keep this list in mind before you enter that room for a two-on-one interview at your favorite
investment bank.
*ere are the top .4 things they hate about you+
Arro.ance
#ankers are supposed to be cocky, aren"t they= :ot true, our banker sources replied. %<rrogance
and confidence are too easily confused,% said one. %his is still a business where people e5pect you
to pay your dues. 6ou"re not going to make it if you think you"re too good for a pro&ect.% <nother
source said, %Ene of the most important aspects to succeeding in this business is getting along with
people. <ll kinds of unusual and sometimes difficult personalities occupy senior positions. he last
thing we need is a fresh ;#< with a big mouth.%
A -ac< o* "cris(ness"
Ether sources replaced %crisp% with the words %sharp% or %polished% to describe a candidate that %has
it together.% #asically, the bankers noted that candidates have to be well prepared. %6ou would be
surprised how many people don"t know how to walk you through their resumes. 6ou have to know
your story and tell it convincingly,% advised one source. <nother added a caveat to preparing oneself
for the interview. %Aon"t be too slick. ! hate when ! feel like !"m hearing a rehearsed speech word for
word.%
A -ac< o* socia- s<i--s
%!"ve been bored by people in interviews,% said one !-banking source. %! hate to say it, because it
sounds so elitist. #ut investment banks are selective organi$ations - highly selective - and some
people have great resumes and no personalities.% <nother added, %!t"s a people business. !"m not
saying that everybody at Rmy firmS is the most e5citing person, but there are basic sociability
requirements.% Ene more !-banker said his selections process includes a beer test. %! basically ask
myself+ could ! sit down and have a beer with this person=%
A(at0etic
)ome people are boring, and others are bored. %Enthusiasm is key. ! don"t want someone giving me
a line about how much they love working all night, but ! like to see some energy,% e5plained one
source. <nother !-banker added, %!t"s important that people think you"re ready to go. < lot of us get
burned out sometimes, and it"s refreshing to meet someone who has &ust had a two-year vacation
Rthat is, business schoolS, and is raring to go. ! like to hear that they"re looking forward to getting back
to work. )ome people come in here and seem so e5hausted. ! think, if they"re tired now, what will
they do when they haven"t slept in two days= ! guess some people get nervous and &ust clam up.
hat"s going to hurt you a lot in an interview.%
S0ut u( a-rea1/
he opposite site of the %clam-up% problem, one source told us is %verbal diarrhea.% %)ome people, !
guess,% our source e5plained, %get nervous and they talk. <nd talk and talk. 6ou give them a simple
question, something that should take them one minute to answer, and you end up listening to a life
history.% %#revity is key,% another source added. %!n banking, speed and efficiency are key. here"s
no room for rambling.%
4ot tou.0 enou.0
%Ene thing ! hear a lot Rin meetings when candidates are discussedS,% one source e5plained, %is
people saying+ %that guy would get killed in this &ob.%% Aespite efforts by investment banks to promote
more positive work environments, at least one insider told us that %you still need to be tough. ! meet
someone sometimes and know .44 percent that the person would get eaten alive here.% Pro&ecting
an ability to handle the une5pected is part of the toughness that interviewers seek. <s one source
e5plained, %!"m sure that a lot of these candidates we turn away might be able to hack it, but no one
wants to take a chance on a maybe.%
5oesn=t 1e&onstrate enou.0 >uantitative s<i--s
%)ome candidates &ust don"t make me feel like they can handle the numbers,% said one source. %!t"s a
tough thing to e5plain, because it has a lot of components. !f they don"t seem to have the coursework
or professional background, ! worry that they won"t be comfortable with the quantitative side of
things. < lot of candidates don"t seem to reali$e the problem in their resume and so they never go
out of their way to show us that they have the skills. ! think that"s key, looking at your resume and
finding the blanks.%
"ersona-it/ 1oesn=t *it wit0 t0e *ir&
%Ence in a while,% one source e5plained, %you meet someone who you know will &ust hate it here.%
*e went on to say that this situation was often a combination of various factors, some of which we"ve
already listed. %hey could be a fine banker, but something about their philosophy or their personality
doesn"t seem to fit. ! don"t want it to sound snobbish because it"s not about being good enough.
Bertain places have personalities. #ig places are often very different form small places. )ome
people want a lot of structure, and some people can"t stand too much structure, for instance. People
here often say, %! could never have worked at such and such bank.% !"ve found that people who like
the ;errill culture and people who like the Ioldman culture are often very different, for e5ample.
here"s a dynamic that you have to keep in mind when you"re recruiting people.%
Litt-e w0ite -ies
%!t seems like at least once during each )uper )aturday session,% one source reported, %we get one
candidate who gets caught lying on his resume. :ot an outright, ridiculous lie, but someone will ask
them about something on their resume and it will be obvious that the candidate doesn"t know as
much about a pro&ect as his resume might imply.% <nother source agrees, and says that a re&ection
is guaranteed if someone uncovers a %highly embellished resume.% %People are going to ask you
about your resume. !f something looks too good to be true, you"ll be called out on it,% he comments.
%#e prepared. <nd don"t lie. !f you said you worked on some complicated transaction, you better be
prepared to discuss it.%
It=s not /ou9 it=s &e
%)ometimes,% one source says, %one RinterviewerS will really have a bad reaction to somebody.% ;any
of our sources agreed that people had been re&ected based on an une5plainable reaction by one
-usually senior1 person. %! feel bad even saying it, because !"m not sure what kind of advice ! could
offer to prevent it from happening.% Ene source adds, %! would say that some candidates have a
tendency to focus on their ne5t answer and don"t concentrate on gauging how they"re doing with the
interviewer. )ometimes if you pick up a bad vibe from someone, you can perform some damage
control.% <nother source was less optimistic about these situtations. %)ome people decide they don"t
like a candidate the second he walks into the room. hat"s &ust the luck of the draw if you get one of
those interviewers. ! wouldn"t say a lot of people are like that, but they are out there. o some e5tent,
interviewing is a crapshoot. )ome people get lucky, others don"t.%