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The 8 Best Investment Banks of 2020
Money makes the world go ’round
When you think of a bank, you probably think of a place that takes deposits, maintains checking and savings accounts, and offers loans like mortgages. That’s true, but there’s an entirely different type of bank focused on stocks, bonds, and investment products. These financial firms may be a part of a larger firm that also offers commercial banking services, but they take a unique role in the financial system that influences the entire economy.
The best investment banks are large financial institutions that play an important role in facilitating money moving around the economy. Initial public offerings, for example, are an opportunity for investors to help a company raise money while also getting a stake in the business.
Full-service investment banks offer a wide range of business and investment services. Many of them also own or affiliate with a consumer bank. Most regular consumers won’t need investment banking services, but for growing businesses and high-net-worth individuals, an investment bank may offer unique financial products and services to meet your needs. Need some advice when it comes to finding one to use? Take a look at our picks below for the best investment banks.
Best Overall: Goldman Sachs
Goldman Sachs is the most prestigious investment bank. The nearly 150-year-old institution is a public company with $917 billion in assets as of 2020. Multiple high-ranking government officials spent time at Goldman, including U.S. Treasury secretaries, White House advisors, and leadership roles in central banks and governments around the world. This makes it incredibly influential and a major power hub on Wall Street.
While the bank has endured its fair share of controversies, including a role in the 2008 financial crisis, it also engages in a wide range of corporate citizenship initiatives.
Some major services and divisions include financial advisory and underwriting, its own investing and lending portfolios, institutional investor services, investment management, and private equity. Outside of investment banking, the company operates Marcus, an online consumer bank.
Best From a Large Institution: J.P. Morgan Chase
J.P. Morgan Chase is one of the largest financial institutions in the world. This massive company is made up primarily of two divisions. The Chase side of the company is a business and commercial bank. The J.P. Morgan brand is focused more on investments, including investment banking. The company holds a mind-boggling $2.5 trillion in assets.
On its website, J.P. Morgan puts a big focus on mergers and acquisitions, a lucrative investment banking service. Other offerings include advisory services, capital raising, and risk management.
Like most large banks, J.P. Morgan Chase came together from a series of mergers and acquisitions of its own. Predecessors include Chase Manhattan Bank, Bank One, Bear Stearns, and Washington Mutual. The oldest predecessor was the third oldest bank in the country and 31st oldest in the world. It was founded by Aaron Burr. Yes, the same Aaron Burr of Hamilton infamy.
Best in Europe: Barclays
Barclays may not be the biggest name on this side of The Pond, but in the United Kingdom, everyone is familiar with Barclays. Headquartered in London, Barclays was founded in 1690 and holds £1.1 trillion in assets (around $1.5 trillion USD).
Consumers in the United States may be familiar with Barclays credit cards, and a consumer banking service is also under development for the U.S. It has a major presence in New York and other world financial centers both in and out of Europe.
Barclays made a big leap into U.S. investment banking with the acquisition of Lehman Brothers in 2008. Another investment bank with a history of scandal (something pretty consistent in this industry), Barclays took heat for its compliance in the Lehman acquisition and made headlines in 2020 for its role in the LIBOR scandal. Nonetheless, it remains a large and respected investment bank and holds a role as one of the biggest investment banks in the world.
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Want to learn more? Check out our full review of Barclays.
Best Turnaround: Morgan Stanley
With roots going back to 1924, Morgan Stanley is another major investment bank in the United States. While it doesn’t make it into the trillion dollars in assets club, it holds a respectable $852 billion and falls squarely in the “too big to fail” banking stable. The current Morgan Stanley operation came about in 1997 with a merger creating Morgan Stanely Dean Witter Discover & Co. The name went back to simply Morgan Stanley in 2001.
The international investment bank operates three main divisions: institutions securities, wealth management, and investment management. The wealth management division services individual investors. Much of this division came from the acquisition of Smith Barney, which had previously acquired famed investment bank Salomon Brothers.
Like other major investment banks, Morgan Stanley offers a suite of products for large businesses, including mergers and acquisitions, advising, IPOs, restructurings, and lending. The company just barely survived the 2008 financial crisis and was the largest recipient of TARP (Troubled Asset Relief Program) funds from the government during that tumultuous era for financial companies. It turned itself around after 2008 and today lives up to the long history as a leader in corporate buyouts.
Investment Banking Interview Questions (with Answers)
Top Investment Banking Interview Questions (and Answers)
The purpose of this Investment Banking Interview Questions and Answers is simply to help you learn about the investment banking interview topics. As a fresher in this field, I am sure you may have had jitters as to what and how to prepare for your first step in this finance world. There could be an unlimited number of questions that can be asked on investment banking topics and since it is difficult to cover all of them here, we would be discussing a few of them which are important.
While reading through this write-up, I would suggest you actively keep answering the questions yourself before checking the correct answer. This will help you develop the habit of brainstorming and answering these questions in a structured way. Please consider this as a first draft of the article. I will keep on regularly updating this with more questions and answers based on your feedback.
The interview nowadays does not have the typical questions being asked which include the basics on financial concepts. The interviewers want the candidates to think and avoid theories which everyone usually knows. Also since these questions are technical ones there would always be a correct answer, so in case you find yourself not knowing a particular answer, don’t try and fake one. It is always better to confess that you don’t know.
Investment Banking Interview Questions have been divided into the following 6 topics
#1 – Accounting – Investment Banking Interview Questions
Investment Banking Interview Question #1
Tell me about the three most important financial statements and what is their significance
This is one of the most commonly asked investment banking interview questions.
- The three main financial statements are the Income Statement, Balance Sheet and Cash Flow Statement. Speaking about their significance, the income statement provides the revenue and expenses of a company and shows the final net income that it has made over a period of time.
- The balance sheet signifies the assets of a company such as a plant, property & equipment, cash, inventory, and other resources. Similarly, it reports the liabilities which include the Shareholders’ equity, debt, and accounts payable. The balance sheet is such that the assets would always equal the Liabilities plus shareholders equity.
- Lastly, there is a cash flow statement that reports the net change in cash. It gives the cash flow from the operating, investing and financing activities of the company.
Investment Banking Interview Question #2
In case you have the chance to evaluate the financial viability of the company which statement would you choose and why?
- It would be the cash flow statement. The reason being that it provides a true picture of how much cash the business is generating in actual terms.
- The cash flows are hence the main thing you actually pay attention to while you are analyzing the overall financial health of the business.
Investment Banking Interview Question #3
Let’s say that the depreciation expense goes up by $100. How would this affect the financial statements?
- Income Statement: With the depreciation expense decreasing Operating Income would decline by $100 and assuming a 40% tax rate, Net Income would go down by $60.
- Cash Flow Statement: The Net Income at the top of the cash flow statement goes down by $60, but the $100 Depreciation is a non-cash expense that gets added back, so overall Cash Flow from Operations goes up by $40. With no further changes, the overall Net Change in Cash goes up by $40.
- Balance Sheet: On the asset side because of the depreciation the Plants, Property & Equipment goes down by $100, and Cash is up by $40 from the changes on the Cash Flow Statement.
Investment Banking Interview Question #4
Imagine a situation where a customer pays for a mobile phone with a credit card. What would this look like under cash-based vs. accrual accounting?
- In the case of cash-based accounting, the revenue would not be accounted for until the company charges the customer’s credit card, obtains authorization and deposits the funds in its bank account.
- After this entry would be shown as revenue in the income statement and also as cash in the balance sheet.
- As against in accrual accounting, it would be shown as Revenue right away. But it would yet not appear as Cash in the Balance Sheet, rather it will be shown as Accounts Receivable.
- Only after the amount is deposited in the company’s bank account, it would be reported as cash.
Also, have a look at this detailed explanation on Cash vs Accrual Accounting.
#2 – Corporate Finance – Investment Banking Interview Questions
Investment Banking Interview Question #5
What is the formula for calculating WACC?
Do expect this investment banking interview question.
- WACC = Cost of Equity * Proportion of Equity + Cost of debt * Proportion of debt (1-tax rate). Where, The cost of equity calculated using the Capital Asset Pricing Model (CAPM).
- The formula is Cost of Equity = Risk free rate + Beta* Equity risk premium
- Cost of Debt = The risk-free rate is basically the yield of a 10-year or 20-year US Treasury
- Beta is calculated based on how risky are the comparable companies and equity
- Risk Premium is the percent by which stocks are expected to out-perform “risk-less” assets.
- The proportion is basically the percentage of how much of the company’s capital structure is taken up by each of the components.
Investment Banking Interview Question #6
There are two companies P and Q which are exactly the same, but one P has debt whereas Q doesn’t have any. In this case, which of the two companies would have a higher WACC?
- In this scenario company, Q would have a higher WACC, because debt is less expensive than equity.
Investment Banking Interview Question #7
The interviewer at this juncture might ask you the reasons why debt is considered to be less expensive?
- The answer is as follows; Interest on debt is tax-deductible (hence the (1 – Tax Rate) multiplication in the WACC formula).
- Debt holders would be paid first in a liquidation or bankruptcy.
- Instinctively, interest rates on debt are usually lower than the Cost of Equity numbers you see.
- As a result, the Cost of Debt portion of WACC will contribute less to the total figure than the Cost of Equity portion will.
#3 – Valuations – Investment Banking Interview Questions
Investment Banking Interview Question #8
Describe the ways in which a company is valued
This is another very common investment banking interview question.
Precedent transaction analysis
- This is also called as Transaction Multiple Valuation
- This is when you look at how much others have paid for similar companies to determine how much the company is worth.
- To use this method effectively you need to be extremely familiar with the industry of the company you are valuing as well as the normal premiums paid for such a company.
Comparable Company Analysis
- Comparable company analysis is similar to Precedent Transactions Analysis except you are using the whole company as an assessment unit, not the purchase of a company.
- So to use this method you would also look for out similar companies to the one you are valuing and look at their price to earnings, EBITDA, stock price and any other variables you think would be a pointer of the health of a company.
Discounted Cash Flow Analysis
- This is when you use future cash flow, or what the company will make in the upcoming years, to determine what the company is worth now.
- To calculate DCF you need to work out what the probable or future cash flow is for a company for the next 10 years.
- Then work out how much that would be in today’s terms by “discounting” it at the rate that would give a return on investment.
- Then you add in the terminal value of the company and that will tell you how much the company is worth.
Investment Banking Interview Question #9
Which are the situations in which we do not use a DCF in the valuation?
- We would not use a DCF in the valuation if the company has unstable or unpredictable cash flow or when debt and working capital serve a fundamentally different role.
- For example, financial institutions like banks do not re-invest debt and working capital forms a major part of their balance sheets- so here we do not use a DCF for such companies.
Investment Banking Interview Question #10
List the most common multiples used in a valuation
Valuation questions are very common in investment banking interviews.
These are relative valuation techniques given below-
Investment Banking Interview Question #11
Briefly explain leveraged buyout?
One of the technology investment banking interview questions.
- A leveraged buyout (LBO) is when a company or investor buys another company using mostly borrowed money, loans or even bonds to be able to make the purchase.
- The assets of the company being acquired are usually used collateral for those loans.
- Sometimes the ratio of debt to equity in an LBO can be 90-10.
- Any debt percentage higher than that can lead to bankruptcy.
Investment Banking Interview Question #12
Explain the PEG ratio?
- This stands for Price/earnings to growth ratio and takes the P/E ratio and then accounts for how fast the EPS for the company will grow.
- A stock that is growing rapidly will have a higher PEG ratio. A stock that is finely priced will have the same P/E ratio and PEG ratio.
- So if a company’s P/E ratio is 20 and its PEG ratio is also 20 some might argue that the stock is too expensive if another company with the same EPS has a lower P/E ratio, but that also means that it’s growing faster because the PEG rate is 20.
Investment Banking Interview Question #13
What is the formula for Enterprise Value?
- The formula for enterprise value is: the market value of equity (MVE) + debt + preferred stock + minority interest – cash.
Investment Banking Interview Question #14
Why do you think the cash is subtracted in the formula for enterprise value?
- The reason why cash is subtracted is that it is regarded as a non-operating asset and because Equity Value indirectly accounts for it.
Investment Banking Interview Question #15
Why do we consider both enterprise value and equity value?
- Enterprise value signifies the value of the company that is attributable to all investors, whereas equity value represents the portion available to equity shareholders.
- We consider both because equity value is the number the public at large sees, while enterprise value represents its true value.
Investment Banking Interview Question #16
What does it signify, if a company has a negative enterprise value?
- The company could have negative enterprise value when the company has extremely large cash balances or an extremely low market capitalization or both.
- This could occur in companies that are on the brink of bankruptcy or Financial institutions such as the banks, which have large cash balances.
#4 – Mergers and Acquisitions – Investment Banking Interview Questions
Investment Banking Interview Question #17
Briefly explain the process of a buy-side M&A deal
- Lots of time is spent completing research on the potential acquisition targets and with the company, you are representing, go through multiple cycles of selection and filtering.
- Based on the feedback from them narrow down the list and decide which ones are to be further approached.
- Meetings are conducted to gauge the receptivity of potential seller.
- Serious discussions with the seller take place which calls for in-depth due diligence and figuring out the offer price.
- Negotiate the price and other key terms of the purchase agreement.
- Announce the M&A deal/transaction.
Investment Banking Interview Question #18
Briefly explain accretion and dilution analysis
This one is another technical investment banking interview question.
- In order to gauge the impact of the acquisition to the acquirer’s earnings per share (EPS) and also compare it with the company’s EPS if the acquisition would have not been executed accretion and dilution analysis is undertaken.
- In simple words, we could say that in the scenario of the new EPS being higher, the transaction will be called “accretive” while the opposite would be called “dilutive.”
Investment Banking Interview Question #19
Given a situation where a company with a low P/E acquires a company with a high P/E in an all-stock deal, will the deal likely be accretive or dilutive?
- Other things being equal, in a situation where a company with a low P/E acquires a company with a high P/E, the transaction would be dilutive to the acquirer’s Earnings per Share (EPS).
- The reason for this is that the acquirer will have to shell out more for each rupee of earnings than the market values its own earnings.
- Therefore in such a situation the acquirer would have to issue proportionally more shares in the transaction.
Investment Banking Interview Question #20
What are the synergies and its types?
- Synergies are where the buyer gets more value than out of an acquisition than what the financials would predict. There are basically two types of synergies –
- Revenue synergy: the combined company can cross-sell products to new customers or up-sell new products to existing customers. Because of the deal, it could be possible to expand in new geographies.
- Cost synergies: the combined company could amalgamate buildings and administrative staff and can lay off redundant employees. It could also be in a position to close down redundant stores or locations.
Investment Banking Interview Question #21
How does Goodwill get created in an acquisition?
- Goodwill is an intangible asset that mostly stays the same over years and is not amortized like other intangibles. It only changes when there is an acquisition.
- Goodwill is basically the valuable assets that are not shown like financial assets on the balance sheet. For example, brand name, customer relationship, intellectual property rights, etc.
- Goodwill is basically the subtraction of the book value of a company from its equity purchase price. It signifies the value over the “fair market value” of the seller that the buyer has paid.
#5 – Initial Public Offerings (IPO) – Investment Banking Interview Questions
Investment Banking Interview Question #22
Briefly describe what would you do if you are working on an IPO for a client?
- First of all, we would meet the client and gather all the necessary information such as their financial details, customers and learn about the sector they belong to.
- After this, you would meet other bankers and lawyers the registration statement which would describe the company’s business and market to its investors.
- Next, you would receive comments from the SEC and keep revising the document until it is acceptable.
- Now you would spend the coming weeks in organizing roadshows where you would present the company to the institutional clients and also convince them to invest in them.
- After raising capital for the clients the company would start trading on the exchange.
Investment Banking Interview Question #23
What are the benefits of a company getting listed on an exchange?
- It is an important step for a company to achieve liquidity
- There are certain investors who would want to invest only in exchange-listed issuers
- It helps the company establish a recognized value for their stock which in turn could also help it use stock for acquisitions rather than cash
#1 – Miscellaneous – Investment Banking Interview Questions
Investment Banking Interview Question #24
What is in a pitch book?
Pitch book depends on the kind of deal the company is pitching for but the common structure would include:
- Bank credentials to prove their expertise in completing similar deals before.
- Summary of company’s options
- Appropriate financial models and valuation
- Investment Banking Charts
- Potential acquisition targets or potential buyers
- Summary and key recommendations
Investment Banking Interview Question #25
Tell me a company you admire/follow and pitch me a stock
You need to structure your answer for such investment banking interview questions keeping in mind the following;
- Give the name of the stock you have been following and the reason for the same
- Quickly summarize what the company’s business
- Provide a quick overview of the financials to indicate its size and how profitable it is. Also if you can provide with specific details on Revenue, EBITDA multiples, or its P/E multiple
- Provide reasons as to how the stock or their business is more attractive than its rivals.
- You should speak about the trend the stock has had at least in the past 3-5 years.
- You could also talk about the future outlook for the company.
Investment Banking Interview Question #26
When buying a company why do private equity firms use leverage?
- The private equity firm reduces the amount of equity to the deal by using significant amounts of leverage (debt) to help finance the purchase price.
- By doing this, it will increase the private equity firm’s rate of return substantially when exiting the investment.
Investment Banking Interview Question #27
What is convexity?
- Convexity is a more accurate measure of the relationship between yield and price changes in bonds in relation to the change in interest rates.
- Duration calculates this as a straight line, when in actuality it is a convex curve, hence the name.
- This is used as a risk calculation because it can tell how a bond yield will respond to interest rate changes.
Investment Banking Interview Question #28
Define the risk-adjusted rate of returns
- When looking at an investment you cannot simply look at the return that is projected. If the profit from investment A is greater than the profit from investment B you may immediately want to go with investment A.
- But investment A might have a greater chance of a total loss than investment B so even though the profit may be larger, it is a lot riskier and therefore not necessarily a better investment.
- The adjusted rate of return is when you not only look at the return that an investment may give you, but you also measure the risk of that investment.
- The adjusted rate of return is usually denoted as a number or rating.
- If you are technically minded you may also want to mention the ways that risk is measured: beta, alpha, and the Sharpe ratio, r-squared and standard deviation.
The key to successfully answering these technical investment banking interview questions is to apply the concepts you’re learning and test yourself. Hope this has helped you learn some important question and answers on investment banking topics and brings you steps closer to crack the high profile interviews. All the best
P.S. Kindly note we have only touched upon the technical questions and their types, apart from these you would also have to prepare for the personal questions, why investment banking Interview questions and brain teasers which are usually part of testing the candidates.
Investment Banking Interview Questions and Answers Video
In this guide, we list the top 28 most common asked Investment Banking Interview Questions and Answers that you must know. Here we discuss the tips to answer the Investment banking interview questions on accounting, valuations, modeling, Pitchbook, M&A, IPO, Leveraged buyouts and others. You may also have a look at these Q&A to learn more –
Is a Finance Degree Worth It? 4 Factors Impacting Your Finance Career Forecast
With the glitzy media portrayals of Wall Street’s wheeling and dealing, it’s easy to understand the allure of a finance career. Whether you get a kick out of tracking the stock market or just think finance sounds like an interesting career field, it’s always worth the time to do your research before committing to a Finance degree program.
So is a finance degree worth it? There’s really no cut-and-dry answer to this as it ultimately comes down to you and your preferences. But to help you determine your decision, we compiled four key questions worth considering before pursuing a future in finance.
4 questions to help determine if a finance degree is worth it
Before you commit to a finance career, there are a few important considerations you should be making. Start with the following questions:
1. Do finance jobs pay well?
If someone told you they work in finance, you’d probably assume they’re making quite a bit of money. That’s certainly the case for some. But in reality, most finance professionals aren’t multimillionaire hedge-fund managers—they’re regular folks earning a decent living.
So to help you get a taste of what kind of compensation you can expect, let’s take a closer look at some of the median annual salaries of five common finance positions in 2020:
Keep in mind that according to the Bureau of Labor Statistics (BLS), the national average earnings for all occupations in 2020 was $37,040. Compared to that number, it’s clear that there is exciting earning potential available in the finance field.
It’s also important to note that the salary data listed above includes workers in all locations with all levels of education and experience, so starting salaries may be lower. As a general rule of thumb, earnings increase with education level. Some positions, like personal financial advisors, even offer salaries on commission structure, so your pay is based on your clients’ overall investment portfolios.
2. What does the job market look like for finance professionals?
Another important question to consider is whether the job market is strong for finance-related positions. Earning a good paycheck is great, but if competition for those positions is fierce, it may not matter.
One way to gauge employment prospects is with the BLS’ employment growth projections. According to the numbers, all five of the finance positions highlighted above are expected to see growth in the coming decade. Take a look at the percentages:
- Loan officer: 8% increase
- Financial examiner: 10% increase
- Financial analyst: 12% increase
- Personal financial advisor: 30% increase
- Financial manager: 7% increase
The BLS lists the average projected growth for all occupations as 7 percent. This suggests that the future is bright for professionals hoping to find a job in the finance field.
3. What education and training is needed to enter the finance field?
Finance careers certainly have some positives when it comes to job security and financial stability. But another important factor to consider is what it will take to become qualified for one of these positions.
Financial professionals take on a lot of responsibility within their prospective companies, so it’s not surprising that education and training are a necessity. We used real-time job analysis software to examine more than 1.4 million finance job postings from the past year. 2 The data helped us identify the preferred education levels employers are seeking. Here’s what we found:
- Loan officer: 60% require Bachelor’s degree
- Financial examiner: 96% require Bachelor’s degree
- Financial analyst: 95% require Bachelor’s degree
- Personal financial advisor: 79% require Bachelor’s degree
- Financial manager: 87% require Bachelor’s degree
Our analysis shows that employers value candidates who have a Bachelor’s degree in Finance. In addition to a formal education, there are some certifications that can help improve your job prospects in the field. Here are a few of the in-demand options:
4. What is the work like for finance professionals?
The work of a finance professional can vary greatly depending on the specific company and position. But to give you a taste of the types of roles and responsibilities you may be tasked with, we compiled a list of common job duties for the five finance careers we’ve profiled.
Duties of a loan officer:
- Meet with loan applicants and gather relevant financial information
- Review loan agreements to ensure compliance with regulatory standards
- Explain different loan structures and the terms involved
Duties of a financial examiner:
- Review balance sheets, loan documents and other financial accounts to confirm an institution’s assets and liabilities
- Review new regulations and create plans to ensure compliance
- Report on details of an institution’s financial safety and soundness
Duties of a financial analyst:
- Examine an institution’s financial statements to determine its value
- Recommend investment strategies or portfolios to clients
- Study and evaluate economic and business trends
Duties of a personal financial advisor:
- Meet face-to-face with clients to discuss financial goals and strategies for reaching them
- Educate clients on investment options and the potential risks they may face
- Guide clients financially through life-events like retirement
Duties of a financial manager:
- Review financial reports and seek out ways to reduce costs
- Assist senior management with financial decisions
- Prepare financial statements, reports and forecasts
So is a finance degree worth it?
At the end of the day, only you can decide whether a finance degree is worth your time. If you are fascinated by the world of finance and can picture yourself thriving in one of the positions highlighted above, then you should strongly consider taking the steps to become a qualified job candidate.
No matter which finance profession interests you, a formal education is a smart investment toward your career. Learn more about how a Finance degree can help equip you for a rewarding future in finance.
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