Top 30 Capital Market Interview Questions

Introduction

A capital market is a financial market in which long-term debt or equity-backed securities are traded. Capital markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments. It is a a market for securities, where companies and governments can raise long-term funds. It is a collection of markets where money is invested for long-term purposes. This blog on Capital Market Interview Questions covers most of the important questions that you should look out and expect during the interview process.

Capital markets interviews are conducted to assess a potential candidate’s ability to analyze and provide insights into the current state of the markets. The interviewers will be looking to gauge the candidate’s market knowledge, analytical skills, and ability to communicate their thoughts in a clear and concise manner.

Top 30 Capital Market Interview Questions

Introduce yourself or tell me about yourself — (name, an important quality, position) 

Answer:  This is one of the regular and commonly asked questions in any interview, whether it’s a job interview, MBA interview, or any other circumstances. It’s very important to know about the candidate to the interview panel members. Remember that with this question, you have the chance to set the tone of your interview, connect with the highlights of your application, and introduce the key points you want to communicate to the interviewer. The answer to this question provides a kind of road map to the panel members, and the next questions should build upon the narrative you establish with this answer.

What Does Capital Market Mean? How Does The Company Raise Funds In The Capital Market?

Answer: Capital market is also known as financial market, the place where the companies can raise their long term capital. In this market they can trade i.e, bought and sold the long term instruments like equity share and debt securities. Capital market is classified into two categories like – Primary market and secondary market. 

Capital markets are where savings and investments are channeled between public or people or institutions with capital to lend or invest and those in need. Suppliers typically include banks and investors. Majorly those who seek capital are businesses, governments, and individuals.

Companies / Corporations have four methods which are used to raise funds in the capital market.

• Equity shares / Ordinary stock – if the company wants to raise funds it means they have a good option to get the fund equity shares are the good option available for the companies. The investors also look at the past records (like financial statements or dividends distribution or credit rating for the instruments) and get interested if the company pays high or reasonable dividends.  Value of shares increases if investors expect the market value to rise.
• Bonds: – Bond is an amount of money which has to be given at a maturity date or when they redeem the bonds. Bondholders receive a regular interest payment at predetermined interest rates. Corporate issues bonds because interest rates which must pay investors are lower than rates of borrowing and holders can sell bonds to someone else before the maturity period.
• Preference shares: – company chooses this to raise capital. If a company has financial trouble the buyers of shares get special status. If profits are limited then owners will be paid the dividend after bondholders receive the interest.
• Debentures: – companies used to raise medium-term or long term capital by getting the debt capital from investors or public or other sources. First preference will be given to the debt holder while payment of interest and repayment of the investment.

What are the major elements/components of capital market?

There are three major elements / components are there namely-

1. Primary market – In the primary market is also known as new issue market or fresh issue market, only IPO’s ( Initial Public Offerings)so the name only indicates that initially they issue the securities or newly issued shares only sold in the primary market. The primary market does not include borrowed finance in the form of loan from financial institutions because when a loan is issued from a financial institution it implies converting private capital into public capital and this process of converting borrowed capital into public capital is called going public. The common securities issued in primary market are equity shares, Preference shares debentures, bonds, preference shares and other innovative securities
2.  Secondary market – in the secondary market they are traded all the existing securities in the market. In secondary markets securities are not issued or trade by the company to investors. The securities are sold by existing investors to other investors. Sometimes the investor needs cash and another investor wants to buy the shares of the company as he could not get it directly from the company. Then both the investors can meet in the secondary market and exchange securities for cash through an intermediary called a broker.

In the secondary market companies do not get any additional capital as securities are bought and sold between investors only so directly there is no capital formation but the secondary market indirectly contributes in capital formation or increase in the market value of shares by providing liquidity to securities of the company.

What are your strengths?

Interviewers wish to see how honest you are about your capabilities and whether you are confident about yourself. Tactfully answer this question highlighting the strengths of your character as a professional. Like my biggest strength is that I am a dedicated professional for my role. Money isn’t the only driving factor that lures me towards a job. I am keen on joining as a capital market consultant because I am passionate about working in this sector. I am dedicated enough to direct my entire focus in learning and gaining new experience every moment and make myself better at the job each day.”

What are the major roles played by consultants in a capital market?

A professional in the capital market must have thorough knowledge about the in and out of the market condition of the stock market. They must be up-to-date with the recent things happening to predict exactly and help in trading with shares, bonds and securities. Moreover, they must provide effective advice to high profile individuals and organizations about optimal investment, the right time to buy or sell, and increase profits. Financial planning and giving accurate analytical advice to clients are two important aspects of the job role in the capital market.

What are the limitations Of Capital Budgeting? 

• The huge amount involved in capital budgeting so decision as to be taken very carefully
• The techniques of capital budgeting requires estimation of future cash flows (inflow and outflow of cash flows)
• Dependency of the informations
• Problem of measuring future uncertain circumstances or situations.

What are the qualities required to be successful In Capital Market?

I trust that a person requires more than qualifications to work in the stock market or capital market. Degrees are required, because you must be qualified to grasp finance and the stock market’s operational activities. However, a person must be well-known about the stock market and have access to the most recent updates. To perfect the function of a financial consultant or advisor, they must also have strong communication and negotiation abilities. Furthermore, making informed decisions about the stock market’s future and the risks and rewards of investment is critical.

What Are The Techniques Available For Evaluation Of Capital budgeting? 

There are 7 tools namely-

a. Net present value (NPV)

b.                  Payback Period (PBP)

c.                   Discounted payback period

d.                  Accounting Rate of Return (ARR)

e.                  Internal Rate of Return (IRR)

f.                    Modified Internal Rate of Return (MIRR)

g.                   Profitability Index (PI)

Where do you see yourself after 5 to 10 years down the line?

Recruiters would like to see your future plan, dedication, preparation towards the goal, and ambition to decide whether you are a capable candidate who wishes to prosper. Inform honestly how you plan to grow in your career and where you would like to reach in the 5 to 10 years down the line. You may talk about a senior level or a high job profile related to the profession.

Five years or 10 years is a lot of time for myself to try and update my skills in this particular career I am interested in. I hope that with my dedication and 100% effort I can easily reach the position of my expectation.

What is NPV (Net Present Value)? What Are Its Acceptance Rules, Their Advantages, And Disadvantages?

This is a technical question in most capital market interviews to test your in-depth knowledge of the topic or concepts. 

Net present value and Payback period methods are traditional methods of investment decision. Net Present Value is a term that shows the cash flow or EBIT (Earning before interest and tax) worth of the company. It denotes both the cash inflow and outflow and is calculated as the sum of the cash flow values.

It is a standard tool for capital budgeting analysis and helps to calculate discounted cash flow and if we have the positive NPV then accept the project and if negative NPV reject the project. Formula for N P V is Cash flow (1 + i) t − initial investment

Advantages of NPV

• It consider the time value of money (Present value / Future value)
• Easy to calculate compared with the other tools
• It consider all the cash flows from the project
• Its gives the ranking according to the NPV value of different projects

Dis-advantages of NPV

• It focuses on the short term projects
• Few cost can’t be estimated when calculating NPV
• Not possible for comparing different sizes projects
• Difficulty in determining  the required rate of return

Explain Payback Period Technique For Evaluation Of Capital Expenditure Proposal?

Payback Period (PBP) is calculated with the help of cash flows and cumulative cash flows which project returns the investment in a short period that project is accepted if the time period is longer than reject the project. 

What is IRR and ARR?

Internal rate of return and Accounting rate of return are also the techniques used for evaluating and analyzing the investment decision.

Internal rate of return is the discount rate or discount factor that makes the net present value of a project zero. In simple words, it is the expected compound annual rate of return that will be earned on a project or investment. 

The accounting rate of return (ARR) is a formula that indicates the percentage rate of return expected on an investment or to project, compared to the initial investment’s value. The ARR formula divides an asset’s average revenue by the company’s initial investment to derive the ratio or return that one may expect over the lifetime of an asset or project. The major drawback of ARR is not considering the time value of money or cash flows, which can be an integral part of maintaining a business operational activity.

What is zero coupon bonds?

The recruiter / interviewer will check the conceptual background for the role.

Zero coupon bonds are bonds in which the face value or par value is repaid at the time of maturity of the bond but the investor will purchase this bond at a discounted price. It does not make periodic interest payments or they do not pay interest during the life of the bonds, hence the term zero coupon bond. When the bond reaches maturity, its investor receives its par value only.

What are Deep Discount Bonds?

In the deep discounted bonds, when bond matures, the company will redeem the investor the full face value of the bond. A bond can be sold at par, at a premium, or at a discount. A bond purchased at par has the same value as the face value of the bond. A bond purchased at a premium has a value that is higher than the par value of the bond. Over time, the value of the bond decreases until it equals the par value at maturity. A bond issued at a discount price below par value is known as deep-discount bond.

Explain how would you value a company

There are many ways of valuing a company majorly 3 ways

1. Asset valuation – company’s assets include tangible and intangible assets. Use the book or market value of those assets to determine the business’s worth. Sum of  all the fixed and current assets and customer relationships as you calculate the asset valuation of the business.
2. Earnings valuation – earnings of the company determines its current value. If the business struggles to bring in enough income to re-pay the expenses or owes its value drops. Conversely, repaying debt quickly and maintaining a positive cash flow improves your business’s value. Use all of these factors as you determine the business’s  earnings valuation.
3. Discount cashflow valuation – If the profits are not expected to remain stable in the future, use the discount cash flow valuation method. It takes your business’s future net cash flows and discounts them to present day values. With those figures, you know the discounted cash flow valuation of the business and how much money the business assets are expected to make in the future.
4. Can you describe your process for evaluating a company’s value?

Process of evaluation of company’s value

• Planning and preparation : for any business or any activity planning and organizing are the first step, because without proper planning cannot go blindly to any activity once the planning is done according to that they need to prepare or organize the things.
• Adjusting the company’s financial statements: For valuation of companies they require the financial statements of the organization with that data applying the techniques so they need to adjust the financial statements.
• Choosing the business valuation methods: next is to what are the available valuation methods in which method is suitable for the organization according to the size of the organization.
• Applying the selected valuation methods : which is suitable for the organization that we need to apply to the data to find the business values. 
• Reaching the business value conclusion: once we get the business value we need to analyze and conclude the business value of the organization.

What is the difference between debt and equity?

• Debt is the liability for the company, which needs to be paid off after a specific period. Money raised by the company by issuing Equity shares to the public or investors, which can be used for a long period is known as Equity.
• Debt holders are outsiders and equity holders are the real owners for the company
• Debt is the borrowed fund while Equity is the owned fund.
• Debt reflects money owed by the company towards another person or other financial institution and Equity reflects the capital owned by the company.
• Debt can be kept for a limited or predetermined or fixed duration of period and should be repaid back after the expiry of that term. On the other hand, Equity can be kept for a long period.
• Debt holders are the creditors whereas equity holders are the owners of the company.
• Debt carries low risk as compared to Equity and while comes to return its vice versa.
• Debt can be in the form of term loans, debentures, and any other loans, but Equity can be in the form of shares and stock only.
• Return on debt is known as interest. In contrast, the return on equity is called a dividend.
• Return on debt is fixed and regular, but it is just opposite in the case of return on equity.
• Debt can be secured or unsecured, whereas equity is always unsecured.

What are different types of derivatives?

A derivative is a contract between two or more parties, whose value is based on an agreed-upon underlying financial asset (like underlying assets) or set of assets. Common underlying instruments include bonds, commodities, currencies, interest rates, market indexes, and securities.

The four major types of derivatives are

• Otions
• Forwards
• Futures, and 
• Swaps. 

When should a company buy back stock?

The main reason companies buy back their own stock is to create value for their shareholders. In this case, value means a rising share price or paying premium value for the share.

Reasons for buyback of stock-

• Excess of cash flow with the company
• For tax perspective also some companies will buyback shares from the shareholders.
• Buyback of shares tend to improve the value of the companies
• Company having sign that the stock is undervalued
• Redemption of shares.

Cost of debt or equity higher?

The cost of equity is always higher than the cost of debt for so many numbers of reasons. One of the biggest factors to consider when focusing on debt and equity is that the cost of borrowing with debt is tax-deductible because of its expenses for the company. Equity is also more expensive because equity investors don’t always receive fixed dividends, like a borrower. Additionally, as per the Companies Act in the financial structure of a firm, debt receives a higher priority than equity in the case of bankruptcy or winding up of a firm. Because of this, lenders will get their money first, so there’s less risk associated with debt as well.

What is monetary policy?

 Monetary policy is a governmental policy that controls the supply of money to their country. Monetary policy plays a large role in the availability or flow of money in the economy. The monetary policy of a government also affects the rupee value as well as the rate of interest on it. When deciding what monetary policy to implement, governments typically work toward goals of stability and growth in the economy.

What is Underwriting and what is its role?

Underwriting is a guarantee given by the underwriter that in the event of under subscription the amount underwritten would be subscribed by him. It is insurance to the company which proposes to make a public offer against risk of under subscription.

Roles of underwriting:

• The primary role of underwriter is to purchase unsold securities from the company and resell to the public.
• The underwriters take the risk that it will be able to resell the securities to the public.
• Dissolution of the issue
• Risk diversification / risk minimisation
• More research on market condition and volatility of securities price.
• Act as a form of insurance to the company.

What are some key differences between commercial and investment banking?

• Investment Bank: An Investment bank is a financial institution that assists individuals, corporations and government in raising finance by underwriting and acts as the client’s agents in the issuance of securities or both. An investment bank may also assist companies involved in merger and acquisitions and provide ancillary services such as trading of derivatives and equity securities & FICC ( Fixed Income Clearing Corporation) services.
• Major roles of investment banks are IPOs, investment management, Mergers & acquisition and other services.
• Higher risk is involved in investment bankers.

• Commercial Bank: The term commercial bank refers to a financial institution that accepts deposits and lending money to the public, offering account services, makes various loans, and offers basic financial products like debit card, credit card, locker facility and savings accounts to individuals and small businesses.
• Major functions of commercial banks are debit & credit card fecility, locker facilities, loans and other functions.
• Less risk is involved in investment bankers.

Can you tell me what a convertible bond is?

Convertible bonds refers to after a specific maturity period the bond holder having the option of converting the bonds into common stock.

In other words,  A convertible bond or convertible debt is a type of bond that the holder can convert into a specified number of shares of common stock in the issuing company or cash of equal value. It is a hybrid security with debt- and equity-like features.

What is the formula for calculating working capital?

Working capital refers to the difference between current assets and current liabilities of the organization. This is very important for all the organizations to meet their day today expenses.

Formula for calculation of working capital is Current assets minus current liabilities or Short term assets minus short term liabilities.

Current assets are Inventory, debtors, bills receivables, tradable securities, prepaid expenses, cash and bank balance.

Current liabilities are Short term debts, creditors, bills payable, bank overdraft, outstanding expenses.

Explain Profitability Index (pi) /benefit Cost Ratio (b/c Ratio)?

The benefit-cost ratio (BCR) is a profitability indicator used in cost-benefit analysis to determine the viability of cash flows generated from a project. 

The Benefit Cost Ratio compares the present value of all benefits / cash flows generated from a project to the present value of all costs.

Formula for Benefit cost ratio is Present value of benefit expected from the project / Present value of the cost of the project

What Are The Advantages And Limitations Of Credit Rating?

The term credit rating refers to a measurable assessment of a borrower’s or companies creditworthiness or credit repayment capability in general terms or with respect to a particular debt or securities or financial obligation. A credit rating can be assigned to any entity that seeks to borrow money : an individual, a corporation, a state or provisional authority, or from the government.

Advantages of Credit rating 

• Helps in investment decisions to an investors or to the public
• Easy to raise fund with the symbols of credit ratings symbols
• It is assurance of safety of the investors fund
• Choice of securities / instruments according to the credit rating signs / symbols
• Rating builds the companies securities value or market value of the security
• Recognition to new companies  

 Disadvantages of credit rating 

• Biased rating and misrepresentation
• Reflection of temporary or short term financial condition
• Current rate may change down the line
• Differences in rating different agencies
• Problem for new companies for selling their securities
• Issuer and rating agencies relationship.

Listed vs unlisted company

Listed company:

• A listed company is one that is registered on various recognized stock exchanges within or outside the country and their shares are freely traded on the stock exchanges.
• It has to follow guidelines given by SEBI
• Owned by many shareholders
• Highly liquid securities
• Volatility is very high
• Stock prices are easily available, which depends on the demand and supply forces. Hence, the market value can be easily gathered.

Unlisted company:

• An unlisted company refers to the company which is not listed on the recognized stock exchange and its shares are not freely traded on the exchange.
• It has to follow guidelines given by Central Government 
• Owned by private investors
• Not liquid securities
• Volatility is low
• Determination of market value is a bit difficult. And the estimated or forecasted market value can be calculated.

What Are The Eligibility Criteria For A Listed Company To Make a Public Issue?

A listed company is a public company. It has issued shares of its stock through an exchange, with each share representing a sliver of ownership of the company. 

Those shares can then be bought and sold by investors, rising or falling in value according to demand. A company must apply to an exchange to be listed.

Eligibility criteria for a listed company to make a public issue are given below:

1. Paid up Capital

The paid-up equity capital of the applicant shall not be less than 10 crores and the capitalization of the applicant’s equity shall not be less than 25 crores, For this purpose, the post issue paid up equity capital for which listing is sought shall be taken into account.

2. Conditions Precedent to Listing:

The Issuer shall have adhered to conditions precedent to listing as emerging from inter-alia from Securities Contracts (Regulations) Act 1956, Companies Act 1956/2013, Securities and Exchange Board of India Act 1992, any rules and/or regulations framed under foregoing statutes, as also any circular, clarifications, guidelines issued by the appropriate authority under foregoing statutes.

3. At Least three years track record of either:

The applicant seeking listing; or The promoters/promoting company, incorporated in or outside India or Partnership firm and subsequently converted into a Company (not in existence as a Company for three years) and approaches the Exchange for listing. The Company subsequently formed would be considered for listing only on fulfillment of conditions stipulated by SEBI in this regard.

4. The applicant desirous of listing its securities should satisfy the exchange on the following:

• Redressal Mechanism of Investor grievance
• Defaults in payment

What is money laundering?

Money laundering is a process that criminals use in an attempt to hide the illegal source of their income. By passing money through complex transfers and transactions, or through a series of businesses, the money is “cleaned” of its illegitimate origin and made to show as legitimate / ethical business revenues/ incomes.

This are the three stages involves in money laundering: 

• Placement
• Layering, and
•  Integration

Conclusion

The capital market is a very important part of the economy and it is essential that it functions properly in order to ensure that businesses can raise the capital they need to invest and grow. The interviewee will have a lot of experience in the capital market and is able to provide a lot of insights into how it works. Hence, it is important to make the most of the interview process by gathering the knowledge they possess as much as possible.

Source: GreatLearning Blog