1. Why is IRR not the same as a return?

What it is checking: The central measurement question in private markets.

• IRR is the discount rate that sets the net present value of the cash flows to zero, so it is sensitive to timing as well as to amount.
• A quick early distribution can produce a high IRR on very little money actually returned.
• It also assumes interim distributions are reinvested at the same rate, which is rarely available.
• Which is why the multiple on invested capital is quoted alongside it: one measures speed, the other measures wealth created.
• And a subscription line that delays capital calls raises the reported IRR without changing anything the fund did.

2. Walk me through a distribution waterfall.

What it is checking: The fee structure, and the details decide who actually gets what.

• Return of contributed capital to the investors first.
• Then a preferred return, a hurdle rate, paid to investors before the manager participates.
• Then a catch-up, where the manager receives a large share until the agreed split is reached.
• Then the carried interest split on everything above.
• The details that matter: whether it is deal-by-deal or whole-fund, and whether there is a clawback if early winners are followed by losers.

3. Why do private assets look less volatile than public ones?

What it is checking: A measurement question, and the answer is appraisal-based valuation.

• They are valued periodically by appraisal rather than continuously by a market.
• Appraisals lag and smooth, so reported returns are autocorrelated and reported volatility is understated.
• That understates correlation with public markets too, which flatters every diversification statistic built on it.
• The underlying economic risk is not lower — it is measured less often.
• Which is why de-smoothing techniques exist, and why they raise both the volatility and the correlation substantially.

4. What is a continuation fund and what is the tension in one?

What it is checking: A current-structures question with a genuine conflict at its heart.

• The manager sells an asset from an existing fund to a new vehicle it also manages, funded by new investors.
• It gives existing investors liquidity and lets the manager hold an asset longer.
• The tension is that the manager is on both sides of the price — seller for one set of clients, buyer for another.
• Which is why an independent valuation, a genuine market check and an informed consent process are the governance around it.
• It is not improper by nature; it is a structure whose safeguards are the whole of the argument.

5. A fund reports 12% net. What do you want to know before believing it?

What it is checking: A scepticism question, and there is a checklist answer.

• Net of what — management fee, carry, fund expenses, and whether a fund-of-funds layer sits on top.
• Over what period, and against which benchmark, measured how.
• Whether it is an IRR or a time-weighted return, because they answer different questions.
• How the unrealised portion is valued, and by whom.
• And survivorship: whether the track record includes the funds that were closed.

6. What is the risk in a fund that offers daily liquidity on illiquid assets?

What it is checking: The 2019 case makes it concrete, and the answer is the mismatch.

• The fund promises daily redemption; the assets take weeks or months to sell.
• In calm conditions flows net out and nobody notices.
• Under outflows the manager sells the liquid holdings first, because those are what can be sold — leaving remaining holders with a more illiquid fund.
• Which makes leaving the rational choice for everybody still in, and that is a run.
• Gates and suspensions stop it, and they arrive exactly when a holder most wants out.

7. Why does a REIT behave differently from the property it owns?

What it is checking: A wrapper question, and the answer separates the asset from its listing.

• A REIT is a listed equity, so it reprices continuously with the equity market and carries equity beta.
• The underlying property is appraised periodically, so it appears smoother and lags.
• The REIT is levered, which amplifies the property return in both directions.
• It also trades at a premium or a discount to net asset value, which is a sentiment variable the buildings do not have.
• So over long periods it tracks property, and over short ones it tracks the stock market.

1. A fund beat its benchmark by three points. What have you learned?

What it is checking: Almost nothing, and saying so is the answer.

• Over one period, very little: the sample is far too small to separate skill from luck.
• The useful decomposition is where the return came from — allocation, selection, currency, or a factor tilt that was not the stated strategy.
• Then whether it came from the risk the mandate authorised, because return from unauthorised risk is a governance problem however good it was.
• And what it cost: fees and turnover come out of the same number.

2. Why is tracking a rule harder than choosing?

What it is checking: The index question, and it separates people who think passive means easy.

• The rule is public, so everybody knows what has to be traded and when, and the flow is front-run.
• Full replication costs turnover; sampling introduces tracking error that has to be managed rather than accepted.
• Corporate actions, dividends, withholding tax and rebalance dates all have to be handled exactly, not approximately.
• The measure is tracking difference against tracking error — the average gap and how variable it is are different failures.

3. What does a fund's published price actually depend on?

What it is checking: The half of asset management nobody outside it sees.

• A valuation struck by the administrator, from prices sourced independently of the manager.
• Which is straightforward for listed equities and a matter of judgement for anything without a screen price.
• It also depends on the timing convention — a fund holding assets that close in another time zone is valuing something stale by construction.
• That is why swing pricing and dilution levies exist: the price has to be fair to the people staying as well as the ones dealing.

4. When does a fund's own liquidity become the risk rather than the market's?

What it is checking: The mismatch between what a fund promises and what it holds.

• When the dealing terms are more liquid than the assets: daily redemption against holdings that take weeks to sell.
• Redemptions are then met by selling the easiest assets first, which leaves the remaining holders with a worse portfolio.
• That creates an incentive to leave early, which is the mechanism of a run.
• The tools are gates, notice periods and honest dealing terms — and using them is an admission the mismatch existed.

5. How do costs actually reach the investor?

What it is checking: The largest single lever on a long-horizon outcome, and most of it is not on a statement.

• The management fee is the visible part and usually the smaller one over time.
• Transaction costs, spreads and market impact come out of the fund's return without appearing as a charge.
• Cash drag, tax on income and securities lending arrangements all move the outcome too.
• And it compounds: the same arithmetic that grows a return grows a cost, in the other direction.

6. What is a benchmark for, and when is it the wrong question?

What it is checking: The reference point that quietly defines the job.

• It states what the fund is trying to do and gives the client something to judge it against.
• It also defines risk: for a benchmarked mandate, risk is deviation from the benchmark rather than loss.
• That is the wrong frame for anybody with a liability — a pension or an insurer — where the reference point is the payment owed.
• So the first question about any mandate is what the money is for, and the benchmark follows from that.

7. Explain diversification to somebody who owns forty funds.

What it is checking: Counting holdings is not diversification, and this is the most common misunderstanding on the buy-side.

• Diversification is about what the holdings do together, not how many there are.
• Forty funds that all own large listed equities are one position with forty fee lines.
• Correlation is the measure, and it is not stable — things that behaved independently converge in a stress.
• So the useful test is what the whole portfolio does in the scenarios that would hurt, not how long the holdings list is.

1. What is a share, precisely?

What it is checking: The simplest question on the desk and the one most often answered with a metaphor.

• A residual claim: whatever is left after every other claim on the company has been met, with no maturity and no promise of payment.
• It carries a vote, which is the mechanism by which residual owners choose the board.
• Liability is limited to what was paid for it, which is what makes it sellable to strangers.
• Its value is the present value of what it will eventually distribute, which is why a company that never pays anything out has to have a reason.
• And it is last in a restructuring, which is the whole of its risk in one sentence.

2. A company doubles its debt and nothing else changes. What happens to the equity?

What it is checking: Whether leverage is understood as a change in the shape of the claim rather than as a number.

• Return on equity rises in good years and falls further in bad ones — the same operating result, amplified.
• The cost of equity rises with it, because the claim is riskier, so a higher expected return is not free money.
• Enterprise value is roughly unchanged in a frictionless world; what changed is how it is divided.
• In practice the tax shield and the cost of distress pull in opposite directions, which is where the real answer lives.
• And the equity starts to look like an option on the enterprise value, which is why it can have value even when the company is technically insolvent.

3. Earnings per share rose and net income was flat. Explain.

What it is checking: A ratio question that catches people who read the numerator only.

• EPS is a ratio, and the denominator is a management decision.
• Buybacks reduce the share count, so the same income is divided among fewer shares.
• The number to check is the net share count, because issuance to employees can offset a whole buyback programme.
• Other explanations: a change in the diluted share count as options move out of the money, or a disposal removing a minority interest.
• None of this is a change in the business, which is the point of the question.

4. Why do index funds have to trade on a specific day?

What it is checking: Whether the candidate knows that a large part of daily volume has no opinion at all.

• An index fund's mandate is to track, so it must hold what the index holds, at the weights the index uses.
• When the index changes — an addition, a deletion, a free-float revision — the fund must match it, and the tracking is measured against the index's own effective date.
• So a rule becomes a large, dated, publicly known trade with no view behind it.
• That is why an index addition moves a price, and why the move frequently reverses afterwards.
• It is also the cleanest example of a forced participant, which is what actually sets prices at the margin.

5. Why would you use a limit order rather than a market order?

What it is checking: Microstructure in one question, and the trade-off has to be stated in both directions.

• A market order guarantees execution and not price; a limit order guarantees price and not execution.
• In a thin book a market order takes liquidity at whatever prices are there, which can be far from the last trade.
• The cost of a limit order is the trade you did not do, which is invisible and can be much larger than the spread you saved.
• So the choice is really about how much you mind not trading at all.
• And in size, neither is the answer — the order gets worked, and the comparison is against a benchmark rather than against a screen price.

6. What is the equity risk premium and why should it exist?

What it is checking: A concept question where a confident wrong answer is common.

• The excess return equities have delivered over a risk-free asset, on average, over long samples.
• The plausible reason is compensation for bearing drawdowns that are genuinely hard to sit through — no pain-bearing, no premium.
• It is estimated rather than observed, and estimates from different periods and methods differ materially.
• Which matters because it is an input to every cost of equity, and therefore to every discounted cash flow.
• So quoting it to one decimal place is a claim about precision that the evidence does not support.

7. A stock yields 9%. What is your first thought?

What it is checking: Whether the candidate treats yield as an input or as an output.

• Yield is dividend divided by price, so a high yield usually means the price fell rather than the dividend rose.
• So the first question is what the market is pricing about the dividend's sustainability.
• Check the payout ratio and the cash flow cover, not the earnings cover — dividends are paid in cash.
• Check whether the dividend is being funded by borrowing or by asset sales, which is a different thing from being funded by the business.
• The answer is descriptive, not a view on the stock: a high yield is a question rather than an opportunity or a warning.

1. A central bank changes its policy rate. Trace what actually happens.

What it is checking: The transmission question, and it separates people who know the lever from people who know the mechanism.

• The rate applies directly to a small set of overnight balances; almost nothing else re-prices because of it mechanically.
• Markets price a path forward from it, which moves the whole curve and therefore mortgage rates, corporate borrowing and the currency.
• Banks then decide how much of that to pass on, constrained by deposit competition and their own capital.
• So the guidance about where the rate goes next is often the larger instrument, which is why the statement is drafted as carefully as the decision.

2. What is the difference between lending to a solvent bank and rescuing an insolvent one?

What it is checking: The lender-of-last-resort question, and the honest answer includes how hard the judgement is.

• The classical answer is to lend freely against good collateral to institutions that are solvent but cannot fund themselves.
• That draws a line between a liquidity problem and a capital one — which from outside look identical.
• In the moment the information is incomplete and the decision cannot wait, which is why resolution frameworks are written in advance.
• And the standing cost is moral hazard: the willingness to lend in a crisis changes the risks taken before one.

3. Why is a risk weight a judgement rather than a measurement?

What it is checking: The most consequential number in banking regulation, and it is written as if it were a fact.

• It is a rule about how much capital to hold against an exposure, chosen by a policymaker or produced by a model the supervisor approved.
• Two exposures with the same weight are not equally risky; they have been treated the same by a rule.
• Which creates a market in whatever the rule scores lightly — the activity moves to where the weight is low rather than stopping.
• That is not an argument against having them; it is the reason they are reviewed and stress-tested rather than trusted.

4. What is a stress test actually for?

What it is checking: Whether you think it predicts or constrains.

• It runs a firm's own book through a scenario the supervisor wrote, so the answer is comparable across firms.
• It is not a forecast: the scenario is chosen to be severe rather than likely.
• Its output is a capital requirement and, often, a restriction on distributions — so it binds rather than informs.
• Its weakness is that a scenario nobody finds stressful produces a passing grade and no information.

5. Explain why an instrument can do exactly what it was written to do and still surprise the market.

What it is checking: The 2023 additional-tier-one question, and it is about ranking rather than about the instrument.

• Loss-absorbing instruments are written to be written down or converted when a trigger is hit or a resolution begins.
• Holders often price them on the assumption that the usual order of loss will be respected in practice.
• When resolution puts one class of holders ahead of another differently from that assumption, the document was followed and the expectation was not.
• Which is why reading the terms rather than the ranking convention is the whole of the analysis for these instruments.

6. Why does a central bank's balance sheet matter as a policy instrument?

What it is checking: The part that stopped being unconventional and is rarely explained.

• Buying assets removes duration from the market and adds reserves to the banking system, which affects longer rates directly rather than through expectations.
• It also makes the central bank a large holder, so the terms on which it stops holding are themselves a market event.
• The exit is therefore harder than the entry: buying is a decision, ceasing to hold is a shock that has to be signalled.
• And the collateral it will lend against shapes what banks are willing to hold in the first place.

7. Prudential and conduct supervision — how do they differ?

What it is checking: Two jobs that use different tools and are often confused into one.

• Prudential asks whether the firm can survive: capital, liquidity, governance, resolvability.
• Conduct asks whether the customer was treated properly: disclosure, suitability, fair pricing, complaints.
• They are separate bodies in many jurisdictions because the skills and the evidence are different.
• And a firm can pass one comfortably while failing the other completely, which is exactly why both exist.

1. What is contango and why does it cost a long investor money?

What it is checking: The single most consequential feature of commodity investing, and it is frequently described backwards.

• A curve where longer-dated futures are more expensive than nearer ones.
• An investor holding a rolling position sells the cheaper expiring contract and buys the dearer next one, so the roll costs money each time.
• That cost compounds, which is why a commodity index can fall over years while the spot price is flat.
• The opposite shape, backwardation, pays the roll, and it usually signals present scarcity.
• The curve shape is therefore a storage and scarcity statement rather than a forecast.

2. Why can an oil price go negative?

What it is checking: The 2020 event made it concrete, and the answer is about delivery rather than about value.

• A physically settled future obliges the holder to take delivery at a place and a date.
• If storage at that place is full, taking delivery has a cost and no available buyer.
• So a holder who cannot store will pay somebody to take the obligation, which is a negative price.
• It is a statement about the delivery point and the expiry, not about the commodity being worthless.
• It also broke systems that assumed prices could not be negative, which was a modelling failure rather than a market one.

3. What is the convenience yield?

What it is checking: The concept that makes the cost-of-carry relationship work for commodities.

• The benefit of holding the physical commodity rather than a claim on it — being able to run a refinery, meet a contract, avoid a stockout.
• It appears in the carry relationship as a negative cost, offsetting storage and financing.
• When it exceeds the cost of carry the curve is backwardated, which is why scarcity shows up as a curve shape.
• It is not directly observable; it is inferred from the curve, which makes it partly a residual.
• Which is why arguments about whether a curve is 'right' are frequently arguments about the convenience yield.

4. Why is a commodity hedge not the same as a commodity position?

What it is checking: The 1993 case makes this a live question, and it is about horizon mismatch.

• A hedge of a long-dated physical obligation using short-dated futures has to be rolled repeatedly.
• So the hedger is exposed to the curve shape at every roll, even though the underlying exposure is unchanged.
• And the futures leg is margined daily while the physical leg is not, which creates a cash flow the hedge did not have.
• A hedge that is correct in aggregate can therefore require enormous cash before it pays anything.
• That combination — roll risk plus margin timing — is what turned a hedged position into a funding crisis in 1993.

5. How do you own gold, and do the four ways behave the same?

What it is checking: A product question with a clean answer and one real trap.

• Physical metal: no counterparty, and storage and insurance cost real money.
• A physically backed exchange-traded product: close to the metal, with a fee and a custody arrangement to read.
• Futures: leveraged, rolled, and exposed to the curve rather than to spot.
• Mining shares: an equity with operating leverage to the price, plus jurisdiction, cost and management risk. It is not gold.
• Two of the four behave like gold and two do not, and that is the whole of the answer.

6. What is a crack spread and who trades one?

What it is checking: A refining question that tests whether the candidate thinks in processing margins.

• The difference between the price of crude and the products refined from it, expressed as a spread.
• It is a refiner's margin, so a refiner hedges it by selling the spread rather than by hedging either leg alone.
• Conventional ratios reflect typical output yields, which is why the spread is quoted as a combination rather than as one pair.
• It widens when product demand outruns refining capacity, which is a physical constraint rather than a financial one.
• So it is one of the clearest cases where a financial instrument is directly a business's operating margin.

7. Why can a single participant break a commodity market?

What it is checking: The 2022 nickel episode, and the answer is about concentration and delivery.

• Commodity markets are small relative to financial ones, and open interest can concentrate in few hands.
• A short position in a physically settled contract requires delivery, and if the deliverable supply is held tightly the short cannot cover.
• Price then rises without limit, because it is a scarcity of the deliverable rather than a valuation.
• Margin calls on that short escalate faster than any risk model assumed, threatening the clearing house itself.
• Which is why an exchange's ability to cancel trades exists, and why using it is so contested.

1. Why would a bank lend at a spread that does not cover its cost of capital?

What it is checking: The single most characteristic thing about this business, and it looks irrational until it is explained.

• Because the loan is priced as part of a relationship, not on its own.
• The return is expected to come from the accounts the company's cash moves through, the hedges it puts on, and the fee business when it buys something.
• That is a real commercial argument and it is also how banks talk themselves into underpriced credit.
• The test is whether the rest of the business actually arrived, measured per client rather than assumed.

2. What is a covenant for?

What it is checking: Checking whether you think a covenant is a punishment or a trigger.

• It is a right to a conversation, triggered early enough that something can still be done.
• It does not stop a company deteriorating; it stops the lender finding out last.
• Which is why the useful question about any covenant is what it permits rather than what it forbids.
• And why covenants loosen when credit is easy, exactly when they would have been worth most.

3. Cash-flow lending against asset-based lending — when does the difference matter?

What it is checking: Two ways to secure a loan, and one of them is a forecast.

• Cash-flow lending secures against what the business is expected to earn, tested by covenants.
• Asset-based lending secures against something countable — receivables, inventory, equipment — and is sized off that.
• In a good year both look the same; in a bad one the forecast disappears and the countable thing does not.
• The trade is that asset-based lending advances less and survives more.

4. What does a treasurer actually want from a transaction banking relationship?

What it is checking: Whether you can describe the client's problem rather than the bank's product.

• One view of cash across every entity and currency, which sounds trivial and is the hardest part.
• Money in the right legal place on the right day, which is a question about location as much as about totals.
• Payments that do not fail, and a fast answer when one does.
• And structures — sweeps and pooling — that are legally sound rather than merely convenient.

5. Why does a bank charge for an undrawn facility?

What it is checking: A commitment is a position, and this checks whether you see it.

• Because the commitment is real: the bank has to hold capital and be able to fund the drawing whenever it comes.
• And it will come at the worst moment — undrawn lines are drawn when a company cannot fund itself elsewhere.
• So the commitment fee pays for an option the borrower holds and the bank has written.
• A facility that is free to keep open is one the bank has mispriced.

6. How does a letter of credit change who the seller is relying on?

What it is checking: The whole of trade finance in one substitution.

• The seller stops relying on the buyer's willingness to pay and starts relying on a bank's obligation.
• The bank pays against documents rather than against goods; it never sees the cargo.
• That makes the paperwork the security, and it is exactly what a fraud exploits.
• It also turns the exposure into a bank and country line rather than a corporate credit.

7. What is funds transfer pricing and why does getting it wrong matter?

What it is checking: The internal number that quietly decides which businesses a bank grows.

• Treasury charges every lending desk for the funding it uses and credits every deposit business for the funding it brings, at a published curve.
• That curve is what makes a loan look profitable or not before any credit judgement is applied.
• Set it too low for long maturities and the bank grows exactly the lending it should be discouraging.
• So it is not an accounting formality: it is the price signal the whole balance sheet responds to.

1. What does a credit default swap actually do?

What it is checking: The instrument definition, and the answer has to reach the protection seller's position.

• The buyer pays a periodic premium; the seller pays out if a defined credit event occurs on the reference entity.
• So the seller is economically long the credit — similar to owning the bond funded at the reference rate — without holding the bond.
• What counts as a credit event is defined in the documentation, and that definition has been litigated.
• Settlement is normally through an auction that establishes a single recovery price for everybody.
• It is the cleanest way to take a view on credit without taking a view on rates, which is why it exists.

2. A five-year spread is 200 basis points. What default probability does that imply?

What it is checking: A mental-arithmetic question with a standard approximation and an important caveat.

• The rough relationship is spread divided by loss given default, giving an annual hazard rate.
• At 200 basis points with a 40% recovery, loss given default is 60%, so the hazard rate is about 3.3% a year.
• Over five years the cumulative probability is roughly one minus the survival probability, so around 15%.
• The caveat matters: this is a risk-neutral probability, which is higher than the real-world one because it contains a risk premium.
• So quoting it as a forecast of default is wrong, and saying why is the point of the question.

3. What actually determines recovery?

What it is checking: Whether the candidate gives a table or a mechanism.

• Seniority and security, first — but security is only worth what the collateral is worth and whether it was perfected.
• The enterprise value at the time, which is a going-concern number if a plan is funded and a liquidation number otherwise.
• The cost of the process, which comes out before anybody recovers.
• The jurisdiction: priority rules, employee and tax preferences, and whether cram-down is available.
• And increasingly the document: a drop-down can move the collateral out of the security package before anybody defaults.

4. Why might a bond and its CDS imply different spreads?

What it is checking: The basis, and it is a good test of whether somebody has thought about funding.

• A bond position has to be funded; a CDS position largely does not, so funding costs drive a wedge.
• Deliverability and the cheapest-to-deliver option affect the CDS side.
• Different documentation: what counts as a credit event in the CDS may not match what the bond's holders experience.
• Counterparty risk on the CDS, and the collateral terms behind it.
• And plain supply and demand — a large hedging flow in one instrument moves it relative to the other.

5. What is a rating actually telling you?

What it is checking: Whether the candidate knows what the ordinal scale measures and what it deliberately does not.

• An opinion about relative creditworthiness — for most agencies, an ordinal ranking of default probability or expected loss.
• It is not a price, not a recommendation, and not a statement about volatility or liquidity.
• It moves slowly by design, which is why the market's spread moves before the rating does.
• It matters mechanically because mandates, index rules and capital requirements reference it — so a downgrade can force selling regardless of anybody's view.
• That mechanical channel is the reason a rating action is a price event even when it contains no new information.

6. Why does credit behave differently from equity in a downturn?

What it is checking: A shape question. The answer is about the payoff, not about sentiment.

• Credit's upside is capped at par plus coupons — it can only be repaid, never more.
• Its downside is a default, so the distribution is a small chance of a large loss against a high chance of a small gain.
• That is a short-option shape, which is why credit returns are negatively skewed and look calm until they do not.
• Equity has the opposite shape: bounded loss and unbounded gain, so it reprices earlier and more continuously.
• Which is why the credit market frequently moves later and then all at once.

7. A company's spread widens sharply and its equity barely moves. What might be going on?

What it is checking: A cross-asset question, and there are several right answers.

• A capital structure event: a debt-funded buyback or a dividend recap transfers value from lenders to shareholders.
• A leveraged acquisition announcement does the same thing, which is why change-of-control puts exist.
• Technical flows: an index exclusion or a large hedging trade in the credit with no equity counterpart.
• Or a documentation event — a liability management transaction that subordinates existing lenders without changing the enterprise.
• The general point: they are claims on the same business with different priorities, so a transfer between them moves one and not the other.

1. How is a new bond priced?

What it is checking: The foundational question, and the answer has to start with the benchmark rather than with the company.

• Start from the relevant benchmark yield at the chosen maturity — a government curve or a swap curve, by convention for that market.
• Add a credit spread, read off where the issuer's existing bonds trade and where comparable issuers price.
• Add a new-issue concession: a few basis points more than fair value, because the buyer is taking a fresh line in size on one day.
• The process is initial price thoughts, then guidance as the book builds, then launch and final terms — usually inside one morning.
• The evidence of demand is not the headline coverage but how much size survives each tightening.

2. The company's spread widened 20 basis points and its yield fell. Explain.

What it is checking: Whether you hold the two components separately in your head. It is a fast filter.

• Yield is the benchmark plus the spread. They move independently and frequently in opposite directions.
• So the benchmark fell by more than 20 basis points, and the all-in yield fell even though the credit got worse.
• This is why a treasurer looking at an all-in coupon and a credit analyst looking at a spread can disagree about the same week.
• It also explains why issuance windows open on rate moves rather than on credit improvement.
• And why a fixed-rate issuer hedging the benchmark separately from the spread is doing two different trades.

3. Why do investment-grade bonds have almost no covenants?

What it is checking: The question that separates a bond person from a loan person, and there is a real answer rather than a shrug.

• Investment-grade protection rests on the rating and on the borrower's need to return to the market, which disciplines it continuously.
• The change-of-control put is usually the whole of the protection, and it is normally conditioned on a rating downgrade — so a takeover that keeps the rating triggers nothing.
• High yield works oppositely: incurrence covenants let the borrower act only if a test is met at that moment.
• A loan works differently again: maintenance covenants are tested every quarter regardless of what the borrower does.
• So the same company can be comfortably inside its bond terms and close to breaching its loan.

4. Why would an issuer run an MTN programme rather than issue one bond?

What it is checking: A practical question about how issuance actually works, and most candidates have never thought about the timetable.

• The documentation is standing and already approved, so a window that opens on a Tuesday morning can be used the same morning.
• It supports many small drawings in different currencies and maturities, including reverse enquiry from a single investor.
• That flexibility is worth more to a frequent borrower than the pricing on any one trade.
• A single benchmark issue is the opposite trade: size, liquidity and a visible curve point.
• So a large issuer runs both — a programme for opportunistic funding and benchmarks to build the curve everything else prices off.

5. What is a covered bond and why does it price through senior unsecured?

What it is checking: A structure question that tests whether you know dual recourse is a statutory thing rather than a contractual one.

• The investor has recourse to the issuer and, if the issuer fails, to a ring-fenced pool of assets that stays on its balance sheet.
• That pool is governed by statute in most European jurisdictions — eligibility, over-collateralisation and supervision are set in law rather than negotiated.
• So the buyer is taking a much weaker credit view than on the same issuer's senior unsecured debt, and prices accordingly.
• It is the instrument that stays open in windows where senior unsecured cannot be sold, which is its whole purpose to an issuer.
• Contrast a securitisation, where the assets are sold to a vehicle and the protection rests on a true sale opinion instead of on a statute.

6. Where does the new-issue concession actually go?

What it is checking: A follow-up designed to see whether the candidate can turn a basis-point number into money.

• It is paid by the issuer, in coupon, for the life of the bond — so it is size times the concession times the years, undiscounted.
• It is received by the initial buyers, as a price gain if the bond trades back to fair value.
• That day-one gain is roughly the concession times the modified duration, which on a long bond is many times the annual coupon effect.
• A negative concession — pricing through the curve — happens when the book is many times covered, and it is the issuer capturing the scarcity.
• A wide concession says either the issuer is paying to be sure of the money, or the book is thin.

7. What is a labelled bond, and what does the label actually bind?

What it is checking: Whether the candidate knows the difference between a use-of-proceeds commitment and a credit feature.

• The label attaches to what the proceeds are used for, or to a target the issuer commits to, and it is disclosed in a framework document.
• It does not change the credit: the bond ranks the same as the issuer's other senior debt and defaults with it.
• Failing the commitment usually triggers a coupon step-up or a reporting obligation rather than an event of default.
• Verification is by a second-party opinion or an assurance provider rather than by a regulator, in the voluntary-standard version.
• The EU Green Bond Standard, adopted in 2023, makes the designation a legal one with defined criteria — which is a change in kind, not in degree.

8. A borrower needs money for an acquisition that closes in nine months. What do you do?

What it is checking: A structuring question with a specific answer that most candidates have not met.

• Provide a bridge facility so the buyer has certain funds and can announce, then refinance it in the bond market when a window opens.
• The bridge is priced to be unattractive to keep — margin steps up over time, precisely so the borrower refinances it.
• The risk sits with the underwriting banks between commitment and take-out, which is what they are paid for.
• If the market closes, the bridge stays drawn and becomes a hung position — the characteristic way a cycle ends.
• So the size of the bridge relative to the market's capacity to absorb the take-out is the real question at commitment.

1. What makes a settlement on a public blockchain different?

What it is checking: The one genuine structural difference, and it should be stated without enthusiasm.

• Settlement is final on the ledger itself, with no intermediary who can reverse it.
• There is no central counterparty, so there is no novation and no mutualised default fund.
• Which means an error — a wrong address, a lost key — has no recourse, unlike an incorrect payment instruction in a bank system.
• It also means settlement finality is probabilistic in some designs rather than legal, which is a different concept from finality in a payment system.
• So it removes counterparty risk and adds operational risk, and which is worse depends entirely on the user.

2. What actually backs a stablecoin?

What it is checking: A question where the honest answer is 'it depends, and that is the point'.

• Some hold reserves in cash and short-dated government debt, and the question is what exactly, audited by whom, and redeemable by whom.
• Some hold other crypto assets over-collateralised, so the peg depends on liquidation working during a fall.
• Some held nothing but an algorithm and a second token, which is the design that failed completely in 2022.
• So the reserve composition, the redemption right and who has it are the three things to establish before anything else.
• A redemption right that only large counterparties hold is a different product from one everybody holds.

3. What is impermanent loss?

What it is checking: A mechanism question with a precise arithmetic answer.

• A liquidity provider in an automated market maker holds a changing mix of two assets as their relative price moves.
• The pool rebalances mechanically, selling the one that rises and buying the one that falls.
• So the provider ends with less of the winner than simply holding both would have given — that gap is the loss.
• It is called impermanent because it reverses if the price returns, and it is permanent the moment liquidity is withdrawn.
• Fees earned are what compensate for it, so the question is always whether they exceeded it.

4. Why did an exchange failure in 2022 look like a bank failure?

What it is checking: A structure question, and the answer is about custody rather than about technology.

• Customer assets were not segregated from the operating business, so a claim on the exchange was unsecured rather than a claim on property.
• There was no capital requirement, no supervised balance sheet, and no auditor of the kind a regulated intermediary has.
• So the failure mode was the classic one: assets used elsewhere, a run when that became known, and no lender of last resort.
• None of that is a blockchain question — the ledger worked exactly as designed.
• Which is the general lesson: the risk was in the intermediary, not in the instrument.

5. What is staking, economically?

What it is checking: Whether the candidate separates a yield from a return.

• Locking tokens to help validate a network, in exchange for newly issued tokens and fees.
• The reward is largely paid in the same token, so it is partly dilution of everybody rather than income from outside.
• Net of the issuance rate, the real yield is much lower than the headline, and can be negative.
• There is also lock-up and slashing risk, and, through an intermediary, the counterparty risk of that intermediary.
• So the honest calculation is gross reward, minus commission, minus issuance, converted at whatever the token does.

6. Why does a leveraged token or ETP decay?

What it is checking: A compounding question that applies well beyond this asset class.

• It targets a multiple of the daily return, so it rebalances its exposure every day.
• That means it compounds the sequence of returns rather than the total, and volatility costs money in a flat market.
• The effect is worse the higher the multiple and the higher the volatility, and it is unavoidable rather than a fee.
• Over a long horizon a flat-but-volatile underlying produces a large loss in the product.
• So it is a short-horizon trading instrument by construction, which is a statement about design rather than about quality.

7. How would you explain this asset class to a sceptical risk committee?

What it is checking: A communication question, and the answer that works is neutral and specific.

• Separate the technology from the assets: a settlement mechanism and a set of speculative instruments are different subjects.
• State what is genuinely new — final settlement without an intermediary — and what is not: volatility, leverage and custody failures are old.
• Be precise about custody, because that is where nearly every loss has actually happened.
• Be precise about the regulatory position in the relevant jurisdiction, which differs sharply and is changing.
• And say plainly what you do not know, because a risk committee is testing your calibration rather than your enthusiasm.

1. Why is an IPO deliberately priced below where it is expected to trade?

What it is checking: The single most common ECM question, and the one most often answered as though the discount were a mistake.

• It buys an aftermarket. Investors who bought in the deal have to be able to hold it without a loss, because the issuer will come back for a follow-on or a convertible.
• It pays for information. Investors reveal what they would pay only if they expect to be allocated at a price they like; a book priced to the last cent teaches them not to.
• It is compensation for taking size in one day on a company with no trading history.
• The issuer is buying it consciously — the alternative is a deal that breaks and a register full of people holding a loss.
• A direct listing declines the whole bargain, which is the cleanest way to see what the discount was actually purchasing.

2. A deal is five times covered. Should the price go up?

What it is checking: Whether you know that a book is not a demand curve, and that coverage without price sensitivity says almost nothing.

• Not on that number alone. Coverage says how much size is in the book, not at what price it survives.
• What matters is how much of it stays as guidance tightens — orders that fall away at the top of the range were never demand at that price.
• The composition matters as much: an order from an account that will hold and an order from one that will sell into the break are both size and are worth different amounts.
• Inflated orders are a known feature of the process; syndicate desks discount them, and everybody knows they are being discounted.
• And raising both the price and the size removes the aftermarket cushion twice, which is exactly what a well-documented 2012 listing did.

3. What is a greenshoe and who benefits from it?

What it is checking: A mechanics question with a trap: the stabilisation gain does not belong to the bank.

• The syndicate sells more shares than the deal size, so it is short from the first day, and holds an option to buy that extra amount from the issuer at the offer price.
• If the shares trade below the offer, the syndicate buys in the market to cover the short — that buying supports the price, and the shoe lapses.
• If the shares trade above, the option is exercised, the shares are delivered, and the issuer receives extra proceeds.
• So it is a bounded, disclosed, time-limited support mechanism. It cannot support a repricing, only an opening.
• The economics of the stabilisation belong to the issue rather than to the bank, and the conventional ceiling is fifteen per cent of the base deal.

4. A company needs money and its shares have halved. Rights issue or placing?

What it is checking: A judgement question testing whether you know that pre-emption is a legal constraint and not a preference.

• In much of Europe, issuing new shares requires offering them to existing holders first, in proportion. So a placing needs an authority with a limit.
• A rights issue protects existing holders: they can pay to avoid dilution, or sell the right and be compensated for it. Doing nothing is the outcome nobody chooses on purpose.
• The cost is time and certainty — a rights issue takes weeks and is exposed to the market for all of them, which is why it is underwritten.
• A placing is fast and dilutes existing holders who are not in it, which is why the authority is capped.
• At a halved share price the discount required is large, which makes the rights issue deeply discounted — and that is precisely when doing nothing costs the most.

5. Why does a share price often drift down in the months after a listing?

What it is checking: Whether you can name mechanical supply rather than reaching for a story about the business.

• The stabilisation period ends, so a buyer that was permitted to support the price stops.
• The lock-up expires on a date everybody knows, and shares that could not be sold can be.
• The register has not settled: allocations go partly to accounts that intended to sell into strength.
• The first published results are measured against a forecast the company itself set during the roadshow.
• Pulling the other way, index inclusion is a rule with thresholds, and passing one turns a block of buying into something that has to happen on a date.

6. What is free float and why does anybody care?

What it is checking: It sounds like a definition question and it is a governance question.

• The proportion of shares genuinely available to trade, excluding strategic, founder and locked-up holdings.
• Listing rules set a minimum, because a market in a handful of shares is not a market.
• Index rules set a higher and different one, and index eligibility is usually the bigger prize — it converts a rule into a large block of mandatory buying.
• It also decides how much of a takeover or a placing the market can absorb without moving the price.
• So a tightly held listing can satisfy the exchange and still fail the index, and the second is the one that moves the shares.

7. The headline says the company raised 600 million. What do you want to know?

What it is checking: The single most useful habit on this desk: split the number before discussing it.

• How much is primary and how much is secondary. Primary shares are new, the company gets the money, and existing holders are diluted.
• Secondary shares already exist, a holder is selling their own, the company receives nothing, and nothing is diluted.
• Both count towards free float, which is why announcements print them as one figure.
• A deal that is mostly secondary is holders selling down; a mostly primary deal is a company funding something it can name.
• Then: fees, the greenshoe, and the resulting market capitalisation, because the headline says nothing about any of them.

8. Why would a company choose a de-SPAC over an IPO?

What it is checking: A current-structures question. The honest answer names a real trade-off rather than a fashion.

• Price certainty: the valuation is negotiated with one counterparty rather than discovered in a book.
• Speed and a different disclosure route, with different rules about forward-looking statements — which is what drew regulatory attention.
• The cost is proceeds certainty: shareholders in the shell can redeem, so the cash that actually arrives is unknown when the price is agreed.
• Which is why a PIPE is usually raised alongside it, to underpin the funding.
• And the sponsor's promote is real dilution that an IPO does not have — it has to be in any comparison of the two.

1. You own a call struck at 100 that cost 5. The stock is 103 at expiry. How did you do?

What it is checking: A deliberately easy arithmetic question with a trap: in the money is not profitable.

• The payoff is the greater of the stock minus the strike and zero, so three.
• Minus the five paid, so a loss of two.
• Break-even was 105 — strike plus premium — and that is the number that matters, not the strike.
• Maximum loss is the premium; maximum gain is unbounded. The asymmetry is the product.
• And the position was right about direction and still lost, which is the whole lesson.

2. What is implied volatility?

What it is checking: The central concept, and a wrong answer here is disqualifying on this desk.

• The volatility number that, put into a pricing model, returns the option's market price.
• So it is a price quoted in different units, not a forecast anybody made.
• It is compared with realised volatility to say whether options look dear or cheap relative to what actually happened.
• It differs by strike and by maturity, which is the smile and the term structure — and that shape is itself information.
• It is the market's price for a distribution, and it is systematically above realised volatility on average, which is what a variance risk premium means.

3. Explain delta hedging.

What it is checking: Mechanics plus the reason it is never finished.

• Delta is the change in the option's value for a small move in the underlying, so hedging means holding the opposite delta in the underlying.
• It removes first-order directional exposure and leaves you with volatility exposure, which is usually the point.
• Delta changes as the underlying moves — that is gamma — so the hedge has to be adjusted continuously in theory and periodically in practice.
• Rebalancing costs money in spread and impact, which is what theta is paying for if you are long the option.
• So a long-gamma position makes money in a choppy market and bleeds in a quiet one, and the reverse if you are short.

4. Why is the volatility smile shaped the way it is in equities?

What it is checking: A structure question that separates memorisation from understanding.

• Downside strikes trade at higher implied volatility than upside ones — a skew rather than a symmetric smile.
• Partly because equity returns are not normal: crashes are larger and faster than rallies, so the left tail is fatter.
• Partly because of leverage: as a company's equity falls, its leverage rises, and so does its volatility.
• And partly supply and demand: investors buy puts for protection and sell calls for income, which pushes the two sides in opposite directions.
• A symmetric model priced against an asymmetric world is exactly why the smile exists as an object at all.

5. What does put-call parity actually let you do?

What it is checking: A relationship question, and the useful answer is about arbitrage rather than about algebra.

• A call minus a put at the same strike and maturity equals the forward minus the discounted strike.
• So any three of call, put, forward and rate determine the fourth, and a violation is an arbitrage.
• It means a synthetic long can be built from a call, a put and cash, which matters when the underlying is hard to borrow.
• It is model-free: it does not assume anything about the distribution, unlike an option pricing model.
• Which is why a persistent violation usually points at borrow cost, dividends or a settlement convention rather than at a free lunch.

6. A client wants income and is comfortable being called away. What are you describing?

What it is checking: A product question that tests whether the candidate states the risk as well as the payoff.

• A covered call: hold the stock, sell a call against it, keep the premium.
• The premium is real income and the upside is capped at the strike.
• The downside is unchanged: you still own the stock, and the premium is a small cushion rather than protection.
• So the position is short volatility and short the right tail, which is a genuine view rather than free income.
• Repeated over time it underperforms in strong markets and outperforms in flat ones — which is a description, not a recommendation.

7. Why is a structured note usually worth less than its parts?

What it is checking: A decomposition question, and the answer is a method rather than a number.

• Almost every note is a zero-coupon bond plus one or two options, so it can be priced by pricing the parts.
• The bond leg costs the present value of par; whatever is left buys the option, which is where a participation rate comes from.
• The wrapper adds issuer credit risk that neither part had on its own, and removes the ability to unwind at a fair price.
• The difference between the note's issue price and the sum of the parts is the margin and the distribution cost, which is not usually itemised.
• This is why participation rates collapsed when rates were near zero: the bond leg cost almost par and there was nothing left.

1. How does an FX option differ from an equity option?

What it is checking: Symmetry is the answer, and it is the thing most candidates have never noticed.

• Every FX option is simultaneously a call on one currency and a put on the other, so the two are the same contract seen from two sides.
• Both currencies have an interest rate, so the pricing model carries two rates rather than a rate and a dividend yield.
• Quoting is in volatility rather than in price, and the strike is frequently expressed as a delta rather than as a level.
• The market convention is a risk reversal and a butterfly rather than a strike ladder, which is a different way of describing the same smile.
• And settlement can be deliverable or cash, which is a documentation choice rather than an economic one.

2. What is a 25-delta risk reversal telling you?

What it is checking: A market-convention question with real information content.

• It is the implied volatility of the 25-delta call minus that of the 25-delta put.
• So it prices the skew: which tail the market is paying more to own.
• A large positive number means calls are dearer, which usually means demand for protection against the base currency strengthening.
• It moves sharply around events, and it frequently moves before spot does.
• So it is read as a positioning and risk-appetite gauge as much as a price.

3. A corporate has a foreign currency receivable in six months. What are its options?

What it is checking: A client question, and the answer has to present a trade-off rather than a product.

• Do nothing and accept the exposure, which is a position whether or not anybody calls it one.
• A forward: locks the rate, costs nothing up front, and removes the upside as well as the downside.
• An option: keeps the upside, costs a premium, and that premium is a real cash outflow today.
• A collar: buy protection and sell away some upside to pay for it, which is the common compromise.
• The right frame is the treasury policy rather than a view — hedge the cash flow, not the opinion.

4. Why do barrier options exist in FX in particular?

What it is checking: A product-rationale question. The answer is cost, and then the risk that cost creates.

• A knock-out is cheaper than the equivalent vanilla, because it disappears if the barrier is touched.
• For a hedger with a view about a range, that is a genuine saving on protection they think they will not need at that level.
• The risk is discontinuous: the position's value changes abruptly at the barrier, so the delta explodes near it.
• Which makes them hard to hedge and creates real gamma risk for the seller around a known price level.
• And that concentration of hedging around a level is itself a market effect near well-known barriers.

5. What is a non-deliverable forward and why does it exist?

What it is checking: An emerging-markets question that tests whether the candidate knows why a market is offshore.

• A forward that settles in a convertible currency by paying the difference, rather than by exchanging the two currencies.
• It exists where the local currency is restricted, so a non-resident cannot obtain or deliver it.
• The fixing is against a published local reference rate, which makes that fixing a contested and closely watched number.
• It carries the currency's economics with none of its deliverability, and the two can diverge under capital controls.
• So an onshore and an offshore rate for the same currency can trade apart, and the gap is a measure of the restriction.

6. A central bank defends a currency peg. What should an option trader watch?

What it is checking: The 2015 case makes this concrete, and the answer is about distribution shape.

• A peg truncates the distribution on one side, so options look cheap and realised volatility is near zero.
• That is exactly the shape that pays almost nothing for a long time and then everything at once.
• Watch the reserves being spent to defend it, and the interest rate being used to make holding the currency attractive.
• Watch how much of the market is positioned as though the peg is permanent, because the exit is a liquidity event as much as a price one.
• When a floor was abandoned in 2015 the move was far larger than any model calibrated on the pegged period allowed for.

7. How do you hedge a portfolio of FX options?

What it is checking: A desk-practice question, and the answer is in Greeks rather than in positions.

• Delta first, in the underlying currency pair, and it has to be adjusted as spot moves.
• Then vega, by maturity bucket, because a parallel volatility move is not what actually happens.
• Then the skew and curvature exposures, hedged with risk reversals and butterflies rather than with vanillas.
• Gamma and theta are the running cost and the running income of holding the book.
• And the residual is basis and correlation risk across pairs, which is what a triangle of three currencies quietly creates.

1. Rates rise. Why does a bond fall?

What it is checking: The first question on any rates desk, and the answer must be about competition rather than about sentiment.

• The bond's coupons are fixed. A newly issued bond pays more, so nobody will pay the old price for the old coupon.
• The price falls until the return from holding to maturity matches what is available elsewhere.
• How far it falls depends on duration — the weighted average time to the cash flows.
• Convexity means the relationship is not a straight line: prices rise more when yields fall than they fall when yields rise by the same amount.
• Nothing about the issuer changed; this is arithmetic rather than credit.

2. What is duration, in words a non-specialist would accept?

What it is checking: Whether the candidate can explain it without the formula, which is the actual job.

• The weighted average time until you get your money back, weighted by the present value of each payment.
• Which makes it, usefully, the approximate percentage price move for a one percent move in yield.
• A zero-coupon bond's duration is its maturity; a coupon bond's is shorter, because some money arrives earlier.
• Higher coupons and higher yields both shorten it, because more of the value arrives sooner.
• And it is a local measure — it is accurate for small moves and needs convexity for large ones.

3. Two bonds, same issuer, same maturity, different prices. Why?

What it is checking: A precision question with several legitimate answers, and naming three is the pass.

• Different coupons: a high-coupon bond trades above par and a low-coupon one below, at the same yield.
• Different seniority or security, so they are not the same credit claim.
• Different optionality: a call, a put, a make-whole or a change-of-control provision each move the price.
• Liquidity: an on-the-run benchmark trades richer than an older line of the same maturity.
• And accrued interest — the quoted clean price is not what changes hands.

4. The curve inverts. What does that tell you?

What it is checking: Whether the candidate can give a mechanism rather than a folk statistic.

• Long yields below short ones mean the market expects short rates to be lower in future than they are now.
• That usually means expected policy easing, which usually means expected weakness — but it is an expectation, not a forecast anybody has to be right about.
• There is also a term premium in the shape, and it can be negative, so the pure expectations reading is incomplete.
• It changes behaviour: a bank borrowing short and lending long earns less, which tightens credit independently of any forecast.
• So the mechanism is at least as interesting as the signal.

5. What is a credit spread compensating you for?

What it is checking: Three components, and most candidates name one.

• Expected loss: probability of default times loss given default.
• A risk premium for the uncertainty around that, because defaults cluster in bad states of the world.
• Illiquidity, which is why a small unrated issue trades wider than its default probability alone would justify.
• Historically the spread has exceeded realised losses, which says the last two components are real rather than a mispricing.
• So reading a spread as income is the standard error — most of it is compensation, and some of it is not income at all.

6. Why does a bond fund not mature?

What it is checking: The most consequential misunderstanding a retail investor has, and it comes up as an explanation question.

• A bond matures at par on a date: hold it and you get your money back regardless of the path.
• A fund holds a rolling portfolio and sells bonds as they fall below its maturity band, so there is no date on which it returns par.
• So a fund's loss in a rate rise is real to the holder in a way an individual bond's mark-to-market loss is not.
• The fund's yield does rise, so a long-enough holder is eventually compensated — roughly around the duration horizon.
• The right comparison is a target-maturity fund, which reintroduces the date.

7. How would you check whether a bond is priced correctly?

What it is checking: A method question. The answer is relative value, not an absolute number.

• Build a curve for the issuer from its liquid bonds, and see where this one sits against it.
• Compare its spread with issuers of the same rating and sector, adjusting for maturity.
• Decompose the yield: benchmark, plus spread, plus anything the optionality is worth.
• For a callable, compare yield to worst rather than yield to maturity, because the issuer chooses.
• And say what would make you wrong: a rating action, an issuance calendar, or an index rebalancing are all price events with no new information in them.

1. EUR/USD is 1.10. What does that mean, and which way is up?

What it is checking: The rookie error that costs real money, tested deliberately early.

• One euro costs 1.10 US dollars. The first currency is the base, the second is the quote.
• A rise in the number means the euro strengthened against the dollar.
• Buying EUR/USD means buying euros and selling dollars.
• A pip is the fourth decimal in most pairs and the second in yen pairs, which is a convention rather than a rule of nature.
• Reading a quote backwards is the classic rookie loss, and the way to avoid it is to say the sentence out loud every time.

2. Is a forward rate a forecast?

What it is checking: The single most useful FX concept, and the answer is a flat no with a reason.

• No. It is spot adjusted for the interest rate difference between the two currencies, enforced by arbitrage.
• If it were anything else, borrowing in one currency, lending in the other and locking the exchange back would leave a gap that somebody would close — so it does not persist.
• So a high-interest currency trades at a forward discount, and a low-interest one at a premium.
• The forward is where the market is indifferent, not where it expects spot to be.
• Which is exactly why the carry trade exists: it is a bet that spot does not move to the forward.

3. Explain the carry trade and its risk in one breath.

What it is checking: Because the return shape is the answer, not the return.

• Borrow the low-yielding currency, hold the high-yielding one, and collect the differential.
• Uncovered interest parity says the high-yielding currency should depreciate by exactly that differential. Historically it mostly has not.
• So the trade has usually worked, with a return shape that is steady accrual punctuated by sudden large losses.
• The losses cluster with volatility spikes, because everybody exits the same crowded position at once.
• And the funding currency typically strengthens in a crisis, so the exchange rate loss and the risk-asset loss arrive together.

4. What is settlement risk in FX and how was it addressed?

What it is checking: A plumbing question, and the historical answer is precise.

• The two legs of an FX trade settle in two different countries in two different time zones, so one side can pay before the other does.
• If the counterparty fails in between, the payer has delivered and received nothing — the full principal, not a mark-to-market.
• It is named after a 1974 German bank failure that happened exactly that way.
• CLS addressed it by settling both legs simultaneously — payment versus payment — so neither moves unless both do.
• Trades outside it, including many emerging-market pairs, still carry the original risk.

5. Should an equity investor hedge currency exposure?

What it is checking: A judgement question where the honest answer distinguishes bonds from equities.

• For a bond portfolio the case is strong: currency volatility is large relative to the return, so hedging removes noise without removing much expected return.
• For equities it is genuinely open. Currency volatility is smaller relative to equity volatility, and the two are sometimes negatively correlated.
• Hedging costs the interest differential, which can be substantial and is not always visible in a fund's headline fee.
• It also introduces cash flow: a hedge that moves against you requires margin, on a portfolio whose assets are not liquid on that timescale.
• So the answer is a framework rather than a rule, and saying that is the correct answer.

6. Why does the cross-currency basis exist if covered parity is an arbitrage?

What it is checking: A stress-gauge question, and it separates the textbook from the market.

• Because the arbitrage requires a balance sheet, and after the crisis balance sheet is a constrained and priced resource.
• So banks demand compensation for putting it to work, and the parity relationship holds only up to that cost.
• The basis widens when dollar funding is scarce, which makes it a real-time gauge of funding stress rather than a mispricing.
• Central bank swap lines exist precisely for the moment it widens dangerously.
• It also has a quarter-end pattern, because balance sheet is measured on reporting dates.

7. What is an FX swap and what is it actually used for?

What it is checking: It is the largest instrument in the market by turnover and most candidates have never described one.

• A spot exchange of two currencies with a simultaneous agreement to reverse it at a forward date and rate.
• Economically it is a collateralised loan in one currency against another — funding, not a directional position.
• Which is why it is used to roll hedges, manage short-term liquidity across currencies, and fund foreign assets.
• The price is the swap points, which are the interest differential over the period.
• It carries almost no exchange-rate risk and considerable funding risk, which is the opposite of what its name suggests.

1. What does market-neutral actually mean, and what does it not remove?

What it is checking: A term used loosely, and the residual risks are the interesting part.

• It means the book has little sensitivity to the direction of the overall market, usually by pairing longs against shorts.
• It does not remove factor risk: the longs and shorts can differ systematically in size, value, momentum or sector.
• It does not remove financing risk, borrow risk on the shorts, or crowding.
• So a neutral book can be enormous gross and lose money on a day the index barely moved.

2. A merger spread is four per cent with two months to closing. What does that tell you?

What it is checking: Reading a price as an implied probability, which is what the seat does all day.

• Annualised it is a much larger number, so the first step is to put it on a comparable basis.
• It is not free money: it is the market's price for the chance the deal breaks and the shares fall back.
• To read a probability from it you need an estimate of where the shares trade if it fails, which is the harder half.
• And the payoff is asymmetric — small frequent gains against rare large losses — so position size is the real decision.

3. Why is a relative value book more fragile than it looks?

What it is checking: The leverage that a small edge requires, and what that does to a drawdown.

• The gap between two nearly identical instruments is small, so it takes leverage to make it a return.
• Leverage means the position is sized against a lender's willingness rather than against the market.
• So the spread can widen before it converges, and being right eventually is no defence against a margin call today.
• And everybody holds the same pair, so the unwind is a divergence rather than a convergence.

4. How does a backtest lie?

What it is checking: The systematic question, and it wants specific mechanisms rather than scepticism.

• Overfitting: enough parameters tested on one history will find a rule that describes it and predicts nothing.
• Survivorship and look-ahead: testing on the names that still exist, or using data that was not available at the time.
• Ignoring cost: a signal that trades often can be profitable gross and negative after spread and impact.
• And capacity: a rule that works on small size stops working at the size that would make it worth running.

5. In distressed, what decides the outcome more than the business does?

What it is checking: The document, and whether you know to read it before forming a view.

• Where the claim sits: which entity issued it, what it is secured on, and what ranks ahead of it.
• Structural seniority — debt at an operating company sits ahead of debt at the parent whatever either document says about ranking.
• What the agreement permits: assets that can be moved, or new debt that can be put in front.
• Two lenders to the same company can therefore have entirely different outcomes, and that is the analysis.

6. What is the fee structure actually paying for, and what does it distort?

What it is checking: Incentives, stated plainly rather than avoided.

• A management fee funds the operation; a performance fee pays a share of gains above a threshold.
• The performance fee is an option: the manager participates in the upside and does not repay the downside.
• A high-water mark limits that by requiring past losses to be recovered first — without one, volatility itself is profitable to the manager.
• So the terms to read are the hurdle, the high-water mark, and whether fees are charged on gross or net exposure.

7. What does a prime broker give a fund, and what does it take?

What it is checking: The relationship that decides how much leverage a fund can actually run.

• It finances long positions, sources the borrow for shorts, clears and settles, and reports the whole book.
• In exchange it sets the margin, which is the real limit on the fund's leverage and is negotiated rather than given.
• It can change those terms, and it will do so when it is most inconvenient.
• Which is why funds run several and why no single broker can see the whole picture.

1. How is an insurance premium built up?

What it is checking: The opening question, and the second half of the answer is the one people forget.

• The expected cost of claims, which is an estimate about events that have not happened.
• The cost of the capital held to be able to pay the ones that are worse than expected — this is what makes it a business rather than a bet.
• The expenses of writing and servicing the policy, and commission where there is any.
• Terms move the expected loss more than the rate does: exclusions, deductibles and limits are where the pricing actually is.

2. What is the combined ratio and what does it not tell you?

What it is checking: The industry's headline measure, and it deliberately excludes half the business.

• Claims and expenses divided by premium: under a hundred means the underwriting made money on its own.
• It says nothing about the investment return on the premiums held in between, which for a long-tail line can be most of the economics.
• And it depends entirely on the reserve estimate, which is an opinion that will be revised for years.
• So it is read alongside reserve development — whether last year's estimate is proving too high or too low.

3. Why does an insurer invest differently from a mutual fund with the same money?

What it is checking: The liability comes first, and that turns the whole job upside down.

• A fund is measured against an index; an insurer is measured against payments already promised to somebody.
• So the objective is matching — assets whose cash flows land when the claims do, with the same sensitivity to rates and inflation.
• Every asset also carries a regulatory capital charge, which is a real cost of holding it and changes what is worth owning.
• A portfolio that beats a benchmark and does not match the liabilities has failed at the actual task.

4. Why is a downgrade worse for an insurer than a price fall of the same size?

What it is checking: A rating boundary is a capital cliff, which makes the seller forced rather than willing.

• Capital requirements step at rating boundaries, so a one-notch move can change the charge sharply.
• That makes selling a requirement rather than a choice, and the whole market knows which holders are near the boundary.
• So the price move happens before the sale, and the forced seller realises the worse of the two.
• It is the clearest example on this site of a price being set by whoever has to trade rather than whoever has the best argument.

5. Explain the difference between a defined benefit and a defined contribution pension.

What it is checking: Two arrangements that are not variations of one thing, and confusing them makes most pension writing unreadable.

• Under defined benefit the scheme owes a specified income and carries all the risk of getting there.
• Under defined contribution the member carries it: what they get is what the pot bought.
• So the scheme's job changes completely — from investing against a liability to designing a default fund almost nobody will change.
• The funding level is a defined benefit concept; for defined contribution the equivalent question is what a member is projected to have, and costs decide most of it.

6. A pension scheme's funding level fell and its assets rose. How?

What it is checking: The discount rate, which moves the deficit more than a year of returns does.

• The liability is the present value of payments decades out, discounted at a rate that moves with the market.
• If that rate falls, the present value of what is owed rises — often by more than the assets did.
• Which is why schemes hedge the rate and inflation sensitivity rather than simply investing for return.
• And why the funding level, not the asset return, is the number the scheme is actually run against.

7. A hedge is economically correct and the scheme still had to sell. What went wrong?

What it is checking: The distinction between being right and being able to hold on, which is the whole of 2022 in one question.

• The hedge was held with leverage, so a move in rates produced collateral calls.
• The gains on the hedge are in the liability, which does not pay cash; the calls are in cash, today.
• Meeting them meant selling the growth assets that were closing the gap, at the worst moment.
• So the failure was liquidity rather than strategy — a hedge needs a collateral plan or it is a position rather than a hedge.

1. How much debt can this company carry?

What it is checking: The core question of the desk, and the answer must name two tests rather than one multiple.

• Two constraints bind: a leverage ceiling, as a multiple of EBITDA, and an interest cover floor.
• Capacity is the smaller of the two, and which one binds tells you what the structure is exposed to — a low-rate high-multiple structure binds on leverage, a high-rate one binds on cover.
• Then check that the business funds itself at that level: EBITDA minus capex, minus cash tax, minus interest, has to be positive.
• Both tests can pass and the company can still fail, because neither of them is about the maturity.
• And the definitions matter more than the numbers — what counts as EBITDA is set in the credit agreement, add-backs included.

2. Where does a buyout return actually come from?

What it is checking: The question that separates a rehearsed answer from an understood one, because the three sources can be separated arithmetically.

• Earnings growth: the business generates more than it did.
• Multiple expansion: it was bought at one multiple and sold at a higher one. That is the market's doing rather than the sponsor's.
• Debt paydown: cash generated by the company repaid the loan, so the equity is worth more even with everything else unchanged.
• Each can be measured holding the other two at entry, which is how you say which one dominated a given deal.
• The honest observation: when most of the return is multiple expansion, the sponsor was in the right asset class at the right time.

3. Rates rise 200 basis points. What happens to buyout activity?

What it is checking: Whether you can trace a rate move through to a bid price rather than gesturing at sentiment.

• The interest cover test tightens immediately, so debt capacity falls even if the leverage ceiling is unchanged.
• Less debt at the same required equity return means a lower price the sponsor can bid.
• So sponsors drop out of processes against strategic buyers, whose bids are not funded this way.
• Sellers who do not need to sell withdraw, which is why volumes fall rather than prices — the transactions simply do not happen.
• Existing structures are affected differently: floating-rate debt reprices immediately, and a hedge that expires is a cliff on a known date.

4. What does cov-lite actually mean?

What it is checking: A term everybody uses and most candidates overstate. The precise answer is a differentiator.

• It means no maintenance covenant — no quarterly ratio the borrower must satisfy regardless of what it does.
• Incurrence covenants remain: the borrower still cannot take on debt, pay a dividend or sell an asset without meeting a test at that moment.
• So the document still governs actions; what is lost is the early warning.
• The practical effect is timing — lenders arrive at the table later, by which point the cushion has usually been spent.
• Springing covenants are the common compromise: a single test that applies only if the revolver is drawn past a threshold, which protects the bank rather than the institutional lender.

5. Why does it matter who holds the loan?

What it is checking: A modern question. The instrument is identical and the outcome in a stress is not.

• A bank syndicate can be convened, and each lender values the borrower's other business — an amendment can be agreed in weeks.
• A CLO is a portfolio governed by ratings, diversity and coverage tests, so its behaviour under a downgrade is mechanical rather than negotiated.
• A unitranche lender is one telephone number: fastest to amend, and no syndicate for the borrower to hide behind.
• Marks are less visible the further a loan travels from a syndicate, which makes a stressed situation less legible than the equivalent bond.
• And the amendment provisions have become their own risk — what a majority may change decides what every other term is worth.

6. Talk me through sources and uses.

What it is checking: A modelling question. The point is that the equity number is an output.

• Uses: the purchase price, any existing debt being refinanced, and fees and expenses.
• Sources: new senior debt, subordinated debt, cash on the target's balance sheet being used, and any equity management rolls over.
• The two columns must be equal, so the sponsor's cash equity is whatever the rest does not cover — it is a plug, not a decision.
• Rolled equity is a source because it never leaves; whether a lender counts it towards the sponsor's contribution is a credit-agreement question.
• A negative plug means the structure returns cash at closing, which lenders will ask about.

7. What is a dividend recap and who should be uncomfortable about it?

What it is checking: It is a question about incentives, and the answer has to describe the document rather than criticise the sponsor.

• The company borrows more and pays the proceeds to its owner as a dividend. Leverage rises, the owner takes cash out, and the business is unchanged.
• Whether it is permitted was decided years earlier, in the restricted payments basket and the builder basket of the credit agreement.
• Existing lenders are worse off, and if the document allows it they have already consented — which is the whole point of reading the permissions first.
• It is neither a scandal nor free: it raises the leverage that the maturity refinancing will be measured against.
• The instinct it should trigger is to check what other permissions sit next to it, because that basket is rarely the only wide one.

8. A borrower services its debt comfortably every year and still fails. How?

What it is checking: Whether you distinguish a cash-flow risk from a refinancing risk. Most candidates conflate them.

• Interest cover is a flow test. It says nothing about the year the principal is due.
• A structure can pay its interest for a decade and end the period with nearly all of the principal outstanding — the sweep never gets there.
• Refinancing is a market, not a plan: the borrower is exposed to whether the market is open on a date it does not control.
• Meanwhile capital expenditure is the discretionary line, so the cut compounds against a competitor who is investing.
• That shape took twelve years in the best-documented retail example, and looked fine for eleven of them.

1. What does a clearing house actually do to a trade?

What it is checking: Novation, and whether you know it moves risk rather than removing it.

• It steps between the two sides: it becomes the buyer to every seller and the seller to every buyer.
• Neither side then relies on the other; both rely on the clearing house.
• It holds no market risk as a result, and a great deal of counterparty risk, which it manages with margin and a default fund.
• So the risk did not disappear — it was concentrated somewhere designed to hold it, which is a different thing.

2. Initial margin and variation margin answer different questions. Which?

What it is checking: Two things called margin that behave nothing alike.

• Variation margin settles what has already been lost or gained today: it moves cash daily and keeps the exposure near zero.
• Initial margin covers what could still be lost while closing out a defaulted position, over the days that would take.
• So variation margin is backward-looking and certain; initial margin is forward-looking and modelled.
• Which is why raising initial margin in a stress is procyclical — it takes cash out of the market exactly when cash is scarcest.

3. What is the default waterfall and why is the order the point?

What it is checking: Who bears a loss, in writing, decided before anybody defaults.

• First the defaulting member's own margin, then its contribution to the default fund.
• Then a defined slice of the clearing house's own capital, then the surviving members' contributions.
• Writing the order down in advance is what makes members willing to face one institution instead of each other.
• It also means members are exposed to each other's failures, which is a real cost of clearing and is usually left unsaid.

4. A custodian holds your securities. What are you actually relying on?

What it is checking: Segregation, which is the entire product and almost never visible on a statement.

• That the assets are recorded in your name and separated from the custodian's own, so they are not available to its creditors.
• That the chain below it holds — a global custodian holds through sub-custodians, and the local link is where the legal protection lives.
• That elections and entitlements are passed on and acted on, because a missed deadline is a decision made for you.
• Almost nothing on a custody statement tells a reader which of those they actually have.

5. Why does an index provider move real money?

What it is checking: The influence comes from being referenced, not from being right.

• An index is a rulebook, and hundreds of mandates and funds are contractually pointed at it.
• So when the rules add or remove a name, every tracker must trade — on the same day, in the same direction.
• That is a predictable flow, which means it is front-run, which means the fund pays for the very rule it is following.
• The same property makes methodology changes a consultation rather than an announcement.

6. What is a credit rating, and what is it not?

What it is checking: An opinion that regulation points at, which is a strange object.

• It is an opinion about the likelihood of being paid, expressed as an ordering rather than a probability.
• It says little about how much is recovered if it is not paid, and nothing about price.
• Its power comes from being referenced in mandates and capital rules, which turns a downgrade into forced selling.
• And the issuer usually pays for it, which is a structural conflict that process mitigates rather than removes.

7. An exchange cancels a set of trades. What has it done besides reversing them?

What it is checking: Whether you see the second-order cost of an intervention.

• It has protected whoever was on the losing side of those prints and imposed the loss on whoever was on the other.
• It has told the market that a price on this venue is provisional, which changes how everybody quotes afterwards.
• And it has created a precedent that gets argued about at the next extreme move.
• Which is why venues write the conditions for cancellation in advance rather than deciding in the moment.

1. Walk me through what happens between a seller deciding to sell and the money arriving.

What it is checking: The opening question on this desk, and it is testing whether you know there are two halves — a process to reach a signature, and a much longer period of conditions after it.

• Preparation: the seller decides what is being sold, assembles the information, and picks the route — a broad auction, a targeted approach, or a bilateral negotiation.
• Marketing: approaches, a teaser and a non-disclosure agreement, then an information memorandum and non-binding indications of interest.
• Second round: a data room, management meetings, and a draft sale agreement the bidders mark up — the mark-up is part of the bid.
• Signing: terms agreed, and from here the conditions run — competition clearance, foreign investment screening, sometimes a shareholder vote.
• Closing: the conditions are satisfied, money moves, ownership transfers. Between signing and closing, six to twelve months is ordinary.
• The part worth saying out loud: most of the price is made in the second stage, by keeping more than one bidder credible.

2. A target trades at 40 and the offer is 50. Why is the share price 48 rather than 50?

What it is checking: Whether you read a spread as a discount or as a probability. It is the fastest way to tell whether somebody has actually looked at a live deal.

• It is not a view that the company is worth less than the offer. It is the market's estimate that the deal might not complete.
• Two things are in it: the probability of completion, and the time value of money over however long the conditions take.
• So the same completion probability produces a wider spread when the long stop date is a year out than when it is a month out.
• It moves on regulatory filings rather than on business news — a second request or a clearance is what repositions it.
• If it is a share deal, the target's price tracks the ratio times the acquirer's price, so the gap has to be measured against that rather than against a fixed number.

3. The buyer is paying a 30% premium. What has to be true for that to make sense?

What it is checking: Whether you can turn a premium into an annual number, and whether you know the number has to survive tax and the cost of achieving it.

• The premium is paid once, at closing, in cash or in shares. The synergies arrive over years, are taxed, and cost something up front to achieve.
• So the test is: present value of after-tax synergies, minus the cost to achieve, against the premium paid.
• As a rough annual figure: premium times the discount rate, divided by one minus the tax rate, is what has to be delivered every year in perpetuity just to break even.
• Cost synergies are more credible than revenue synergies, because you can name the line they come out of.
• And the honest caveat: if the target's price already reflects an expectation of a bid, part of the premium is being paid for something already in the price.

4. Two offers, same price. One is cash, one is shares. Which should the seller prefer?

What it is checking: Whether you will give an answer that depends on the seller rather than a rule. There is no correct answer, and saying so correctly is the answer.

• Cash fixes what the seller receives. Shares fix a ratio, so what they receive moves with the buyer's price right up to closing and afterwards.
• So it depends on whether the seller wants out, or wants to participate in the combined company.
• Tax usually cuts the other way: cash is generally a disposal and taxable; a share exchange is frequently a rollover, jurisdiction permitting.
• Certainty differs too: a share deal normally needs the buyer's shareholders to approve the issue, which is a condition a cash deal may not have.
• The structural answer: a collar bounds the ratio's movement, and whether one is on the table tells you which side expects the buyer's price to move.

5. What actually kills deals?

What it is checking: Whether your answer is a list of dramatic possibilities or a ranked one. The interviewer wants to hear that execution and price break more deals than regulators do.

• Price, first and most often: the two sides never converge, or a bidder's view changes during diligence.
• Execution: the process runs out of momentum, a key person leaves, the market moves, or the seller's board changes its mind.
• Approval: competition clearance, foreign investment screening, or a sector regulator. Slower and more visible, but a smaller share than people expect.
• Financing: decisive where the transaction is itself a financing — a buyout, a bond-funded purchase — and largely absent elsewhere.
• Diligence: something is found that changes the price or the structure rather than ending it outright.
• The one worth naming: a rule that did not exist when the deal was signed. No condition protects against a change in law, because changes in law are normally carved out.

6. Why would a buyer prefer to buy the assets rather than the shares?

What it is checking: A structuring question, and it separates people who have read a sale agreement from people who have read about one.

• Buying the shares means acquiring the legal entity and everything inside it, including liabilities nobody has found yet.
• Buying the assets means acquiring only what the schedule names — so historic tax, environmental and employment exposure stays with the seller.
• The cost is complexity: every contract may need the counterparty's consent, and licences frequently have to be reapplied for.
• Tax normally pushes the two sides in opposite directions — a buyer can often depreciate an allocated asset price, and a seller often has a participation exemption on a share sale.
• So the structure is usually decided by tax and then priced, rather than argued about on principle.

7. The acquirer's shares fell 6% on announcement. What do you make of that?

What it is checking: Whether you can separate a mechanical flow from a judgement. Most candidates give only the second.

• If it is a share deal, merger arbitrage funds sell the acquirer from the first minutes, in the ratio's proportion. That flow is automatic and roughly the size of the deal.
• Separately, the premium is a transfer to the target's holders that has to be earned back, and the market may be doubting the synergy case.
• And there is a signalling reading: a buyer paying in its own shares is handing over a share of the outcome, which some investors price.
• What it is not is a verdict on the target — the target's shares are up, and those are not two opinions about the same thing.
• Day-one moves are a poor predictor of what an acquisition eventually delivers, because the thing being judged has not happened yet.

8. What is a material adverse change clause actually worth?

What it is checking: A conditions question. The honest answer is 'less than it sounds', and knowing why is the point.

• It lets a buyer walk away if something sufficiently bad happens between signing and closing.
• Courts in the main deal jurisdictions have read it narrowly and against the buyer for decades — the bar is durability and magnitude, not a bad quarter.
• Industry-wide effects are normally carved out, on the logic that the buyer bought an industry too.
• Changes in law are usually carved out as well, which is why a regulatory shift can end a deal's rationale without triggering the clause.
• So in practice it is negotiating leverage to reprice more often than it is an exit — and its real function is to bring both sides back to the table.

1. What is a repo, in one sentence and then properly?

What it is checking: The instrument that funds most of the bond market, and the answer must reach 'legally a sale'.

• A sale of a security with an agreement to buy it back at a set price on a set date — economically a secured loan.
• The difference between the two prices is the interest, expressed as the repo rate.
• It is legally a sale, which is what makes the lender's position robust in an insolvency: it owns the collateral rather than holding a claim over it.
• The haircut is the lender's protection against the collateral's price moving, and it is the number that changes in a crisis.
• A rise in haircuts is a funding contraction that no interest rate shows, which is how a repo market tightens without a rate move.

2. Why is a money market fund not the same as a bank deposit?

What it is checking: A structure question with real consequences, and the candidate should reach the run dynamic.

• A deposit is a claim on a bank, covered by deposit insurance up to a limit and backed by a supervised balance sheet.
• A fund is a share in a portfolio: you own a slice of the assets, and there is no guarantee of par.
• Which means it can fall below par, and the possibility of that is enough to cause a run even when the assets are sound.
• Redemption gates and liquidity fees were introduced after 2008 precisely to interrupt that dynamic — and they can themselves prompt an early exit.
• So the two look identical to a holder and are structurally different in exactly the moment it matters.

3. How does a treasury bill's discount yield differ from its true return?

What it is checking: A convention question that catches almost everybody once.

• A bill is quoted at a discount to par, and the discount rate is calculated on par with a 360-day year.
• That understates the actual return, because the investment is the price paid, not par.
• The bond-equivalent yield divides by the price and uses 365 days, which makes it comparable with a coupon bond.
• The effective annual yield compounds it, which is higher again.
• Three numbers for one instrument, and knowing which one you are being quoted is the whole point.

4. What is the difference between secured and unsecured money market rates?

What it is checking: A benchmark question that has become structural since the reforms.

• An unsecured rate is what banks pay to borrow without collateral, so it contains bank credit risk.
• A secured rate is a repo rate, backed by collateral, so it is close to risk-free and reflects collateral scarcity instead.
• The spread between them is a credit-stress gauge, and it widens sharply before anything else does.
• The new benchmarks are largely secured or near-risk-free, which is why a borrower now pays an explicit credit spread on top.
• And a secured rate can spike for a purely technical reason — a shortage of a specific collateral — with no credit content at all.

5. A bank fails over a weekend. Which of its funding disappeared first?

What it is checking: A sequencing question, and it is really about who can leave fastest.

• Uninsured wholesale deposits and overnight unsecured funding, because they reprice or disappear daily and have no protection.
• Then repo counterparties, who raise haircuts and shorten tenors rather than refusing outright.
• Insured retail deposits are stickiest, though digital banking has made even those move faster than the historic assumption.
• Long-term debt cannot leave at all, which is why it is the layer regulators require for resolution.
• The 2023 failures showed the timescale had compressed to hours rather than days, which the rules had not assumed.

6. What is collateral transformation and why should anybody worry about it?

What it is checking: A plumbing question that connects money markets to derivatives.

• Swapping lower-quality collateral for higher-quality collateral, usually to meet a margin requirement that only accepts the latter.
• It is useful because a pension fund holds assets that are not eligible margin and owes margin in cash or government bonds.
• The risk is that it is a chain: each leg is short-dated and can be withdrawn, so the chain shortens exactly when it is needed.
• It also creates interconnection that is not visible in any single institution's balance sheet.
• Which is precisely what turned a rate move into a liquidity spiral in 2022.

7. Why did central banks start paying interest on reserves?

What it is checking: A policy-mechanics question, and it explains how a floor system works.

• In a scarce-reserve system, the policy rate was set by managing the quantity of reserves.
• After large-scale asset purchases, reserves were abundant, so quantity no longer set the price.
• Paying interest on reserves puts a floor under the money market rate: no bank lends below what it earns risk-free at the central bank.
• That decouples the size of the balance sheet from the level of rates, which is what allows both to be set independently.
• The consequence for a money market is that the policy rate is now an administered floor rather than an outcome.

1. A trade did not settle. Walk me through what has actually gone wrong and what it costs.

What it is checking: The core operations question, and it wants a mechanism rather than a shrug.

• Something did not match: the confirmation, the settlement instruction, the account, or the securities were not there to deliver.
• Delivery against payment means neither leg moves, so both sides are left with an exposure they did not intend.
• It costs money: the party that did not receive has to fund the gap, and there is usually an interest claim or a penalty.
• And it has to be chased with the market rather than with the client, which is why the seat exists at all.

2. What is a reconciliation break, and why does the age of one matter more than its size?

What it is checking: Whether you know which breaks are noise and which are a position nobody owns.

• A break is a difference between two records that should agree — the firm's against the custodian's, the clearer's or the counterparty's.
• Most are timing and clear themselves within a day.
• One that persists is not timing: it is a real difference, and until it is explained the firm does not know what it holds.
• So breaks are ranked by age, not by amount, and an old small break is worse than a new large one.

3. What is the daily profit-and-loss explain, and what does a persistent residual tell you?

What it is checking: The product control question, and the answer is about direction rather than size.

• Yesterday's risk positions applied to today's market moves should predict today's profit and loss closely.
• The residual is what is left over: noise, if the process is sound.
• A residual with a consistent sign is not noise — it means the risk is mismeasured, the marks are wrong, or something is in the book nobody described.
• Which of the three it is decides who has a problem, so the residual is investigated rather than smoothed.

4. How would you verify a price the desk marked, on an instrument with no screen quote?

What it is checking: Independent price verification, which is easy to describe and easy to do circularly.

• Find a source the desk does not control: a consensus service, a comparable instrument, a recent trade, a counterparty's collateral call.
• Where none exists, verify the inputs to the model rather than the output, and test how far the value moves when each one moves.
• Take a reserve for what remains uncertain, up front rather than on discovery.
• And record which of those three routes was used — a mark verified against the desk's own broker is not verified.

5. Why is a system that returns a wrong number worse than one that crashes?

What it is checking: The technology question that is really about failure modes.

• A crash is loud: it stops, somebody is paged, nothing downstream consumes it.
• A plausible wrong number is consumed by every system downstream, priced, reported and traded on.
• By the time it is noticed the wrong value is in positions, risk numbers and possibly a published figure.
• So the design goal is to fail loudly, and the check is reproducibility: yesterday's number regenerated from stored inputs.

6. A corporate action election expires today and the holder has not responded. What happens?

What it is checking: The deadline that cannot be reopened, which is where operational loss actually comes from.

• The default applies, which is a decision made on the holder's behalf by not deciding.
• It cannot be undone afterwards; there is no market to trade back into.
• Whether the loss lands on the holder or the custodian depends on whether the notice was passed on correctly and in time.
• Which is why elections are tracked by deadline rather than by value, in every time zone the client holds in.

7. Where does a spreadsheet become a risk?

What it is checking: The most common piece of production software in finance, and nobody calls it that.

• The moment something the firm depends on runs through it: a valuation, a limit, a regulatory return.
• It has no version control, no test, no access control and usually one author.
• The failure is silent — a dragged formula, a hard-coded cell, a stale link — and it survives because the output still looks like a number.
• The answer is not to ban them but to find them, and to move the ones that matter into something with a test around it.

1. How does a leveraged buyout actually make money?

What it is checking: The opening question, and the answer has three sources that are usually conflated into one.

• Paying down debt with the company's own cash flow, which transfers value from lenders' claims to equity.
• Improving the business — growth or margin — which is the part that is actually work.
• Multiple expansion: selling at a higher multiple than was paid, which is the market's doing rather than the sponsor's.
• Attributing a return to the second when it came from the third is the most common overstatement in the industry.

2. Why is IRR a misleading measure on its own?

What it is checking: The number the industry is sold on, and it rewards speed rather than value.

• IRR is sensitive to timing: an early distribution flatters it enormously regardless of total value created.
• It also assumes reinvestment at the same rate, which is rarely available.
• So it is read alongside a multiple of invested capital, which is timing-blind and says how much money came back.
• And both depend on marks for anything not yet sold, which is where the estimate hides.

3. What is the J-curve and why does it exist?

What it is checking: Whether you know that a young fund looks bad for structural reasons.

• Fees and costs are charged from the start; realisations arrive years later.
• So reported returns are negative early and recover as the portfolio matures — the shape of a J.
• It means a fund cannot be judged on its first years, and comparing funds of different vintages on reported return compares their ages.
• It is also why a secondary buyer entering halfway pays for having skipped it.

4. What is a capital call and why is it a liquidity risk for the investor?

What it is checking: The obligation that arrives on somebody else's schedule.

• An investor commits capital and the manager draws it down when there is something to buy.
• So the investor holds an unfunded obligation with no fixed date, which has to be met in cash.
• Calls tend to cluster when opportunities are good, which is often when the investor's other assets are down.
• Which is why over-committing is the classic institutional mistake, and why pacing is managed rather than left to happen.

5. How is private credit different from a bank loan or a bond?

What it is checking: A market defined by what it is not, so the answer has to be structural.

• It is lent directly by a fund rather than by a bank or through a public bond market.
• So there is no ratings requirement, no public market price, and usually a single lender or a small club — which makes amendments fast.
• The lender is a fund with locked capital rather than a bank with depositors, which changes who can be forced to sell.
• The cost of that is no visible price, so the mark is a model until something is sold.

6. A venture portfolio has one company worth more than everything else. Is that a failure?

What it is checking: The power law, and whether you understand what venture is actually underwriting.

• No — that is the expected shape. Most investments return little or nothing and the outcome is decided by a small number.
• So the discipline is not avoiding losses but making sure the winners are owned in enough size and followed on.
• It also means the reported value depends heavily on the last round price of one company, which is a single negotiated data point.
• And that price is an opinion until somebody buys the whole thing.

7. What makes a continuation fund awkward?

What it is checking: A structure where the same manager can be on both sides of the price.

• An asset is moved from an old fund into a new one, with new investors buying and existing ones choosing whether to roll or exit.
• The manager advises both sides and is paid on the outcome of the new one, which is a structural conflict rather than a suspicion.
• It is managed with an independent valuation, a genuine choice for existing investors, and disclosure of the economics.
• The honest reading is that it can be the right answer for a good asset and is the wrong answer for an unsellable one.

1. What is an interest rate swap and who uses one?

What it is checking: The workhorse instrument, and the answer must reach 'no principal moves'.

• An exchange of a fixed rate for a floating rate on a notional amount, for a term. The notional never changes hands.
• Only the net difference is paid on each date, which is why a large notional supports a small cash flow.
• A borrower with floating debt uses it to fix; an investor with fixed assets uses it to float.
• Its value at inception is zero, and it moves as rates move — so it is a mark-to-market exposure and a margin obligation.
• Which is the point most often missed: being right at maturity does not pay a margin call today.

2. What is DV01 and why is it the number a rates desk quotes?

What it is checking: Whether the candidate thinks in risk units rather than in notionals.

• The change in value for a one basis point move in yield, expressed in currency.
• It makes positions in different instruments and maturities directly comparable, which a notional does not.
• A ten-year swap and a two-year swap with the same notional carry completely different risk; the same DV01 makes them equivalent.
• It is what a hedge ratio is built from, and what a limit is set in.
• And it is local: it needs convexity for large moves, exactly as duration does.

3. How do you build a curve from market instruments?

What it is checking: A bootstrapping question, and the answer must be sequential.

• Take the shortest instruments first — deposits or overnight-indexed rates — and solve for the discount factors they imply.
• Move outwards, using futures or forward rate agreements in the middle and swaps at the long end.
• Each new instrument is solved using the discount factors already determined, which is why it is called bootstrapping.
• Interpolate between the nodes, and the interpolation method is a real choice that shows up as forward-rate artefacts.
• Post-crisis, discounting and forecasting are separate curves, because collateralised cash flows are discounted at the collateral rate.

4. What replaced the interbank offered rates and why does it matter?

What it is checking: A benchmark reform question. It is recent, structural, and frequently answered vaguely.

• Overnight risk-free rates, compounded in arrears, replaced term rates set by panel submission.
• The reason was that the old benchmarks referenced a market that had largely stopped trading, so submissions were judgements rather than transactions.
• The practical consequence is that a period's rate is not known at the start of the period, which changes how a coupon is calculated and when.
• Hence lookbacks, observation shifts and lags in the conventions — all of which exist to give somebody time to pay.
• And a credit-sensitive borrower now pays a spread over a risk-free rate rather than a rate that already contained bank credit.

5. What is a swaption and what is the buyer really buying?

What it is checking: An optionality question with a structural answer.

• An option to enter a swap at a set fixed rate on a future date, as payer or receiver.
• So it is an option on the level of rates at a point on the curve, and its price is driven by rate volatility.
• A borrower planning to issue uses a payer swaption to cap the cost of the rate move before the deal.
• It is also embedded elsewhere: a callable bond is a bond plus a sold receiver swaption, which is why callable spreads behave oddly when volatility moves.
• Which means a portfolio can be short rate volatility without anybody having traded a swaption.

6. Why do pension funds use leveraged rate hedges?

What it is checking: A real-world application, and the 2022 case makes it a live question.

• Their liabilities are decades of fixed payments, so they behave like a very long bond and are extremely rate-sensitive.
• Hedging that with physical bonds would consume the whole portfolio, leaving nothing to generate return.
• So they hedge with swaps and repo, which delivers the rate exposure for a fraction of the capital.
• The hedge is correct and the leverage introduces a liquidity obligation: variation margin is due in cash, same day.
• Being right at maturity does not pay a margin call on Wednesday, which is exactly what 2022 demonstrated.

7. What is the difference between a forward rate and an expected future rate?

What it is checking: A conceptual question that is quietly important and frequently answered wrongly.

• A forward rate is implied by today's curve by arbitrage — it is what makes two funding paths equivalent.
• An expected future rate is somebody's forecast, and there is no arbitrage enforcing it.
• The gap between them is the term premium, and it can be positive or negative.
• So reading forwards as a forecast overstates how much the market is predicting, and understates how much is compensation for risk.
• That distinction is why carry and roll-down can be positive even when nobody expects rates to move.

1. What is the fulcrum and why does it matter?

What it is checking: The first question on this desk, and everything else follows from getting it right.

• It is the point in the stack of claims where the enterprise value runs out.
• Claims above it are covered and will be repaid; claims below it get nothing on the arithmetic.
• The holder of the fulcrum is the one who converts into equity and ends up owning the company.
• Which is why the identity of the holders changes fast once a company is distressed: the claim is bought by people who want the company rather than the coupon.
• And why valuation becomes adversarial — every party's expert puts the fulcrum somewhere different, because where it sits decides ownership.

2. Why can a company not simply agree new terms with its bondholders?

What it is checking: The collective action problem, and it is the reason every court process exists.

• Most indentures require every holder to consent to a change in principal, interest or maturity.
• So a single holder can refuse a deal that every other creditor wants, and the more attractive the deal is to the majority, the more valuable holding out becomes.
• An exchange offer works around it by making the alternative worse, which is why it is voluntary in name only.
• A court process solves it properly: statutory majorities plus sanction bind the dissenters, and cross-class cram-down extends that to a whole class.
• The clearest illustration is a sovereign default with no collective action clause, which ran for fifteen years.

3. What does Chapter 11 give a debtor that an out-of-court deal cannot?

What it is checking: A comparison question. Four specific things, and naming them is the answer.

• An automatic stay: enforcement stops while a plan is negotiated, which turns a race into a negotiation.
• Cram-down: dissenting creditors and dissenting classes can be bound.
• New money with priority: debtor-in-possession financing can prime existing security with the court's permission.
• The ability to reject or renegotiate certain contracts, which for a leaseholder is frequently the whole point.
• The cost is money, time, publicity, and suppliers who tighten terms the moment it is filed.

4. Explain an uptier transaction.

What it is checking: The defining transaction of the last few years, and it tests whether you read documents or headlines.

• A majority of lenders amends the credit agreement to permit new debt ranking ahead of the existing loans.
• That majority then provides new money and exchanges its own holdings into the new super-senior tranche.
• The lenders who did not participate keep their original loans, now subordinated to a tranche that did not exist.
• The permission was already in the document — in the amendment thresholds, the sacred-rights list and the definition of what a majority may agree.
• A drop-down does the same damage from the other direction: the collateral moves to a subsidiary outside the security package.

5. How would you value a company in a restructuring?

What it is checking: A trap. The right answer starts by saying that the number decides who owns it.

• The same methods as anywhere — discounted cash flow, comparables, precedent transactions — but on a business plan that is itself contested.
• The difference is the purpose: the number decides where the fulcrum sits, so every party has an interest in a different answer.
• Senior creditors argue for a low value, because it puts the fulcrum above them and gets them repaid in full.
• Junior creditors argue for a high one, because it brings them into the money.
• So the honest output is a range with explicit assumptions, and an explanation of which assumption moves the fulcrum.

6. What is a standstill for, if nothing is being agreed?

What it is checking: Whether the candidate understands that time is the scarce resource in a distressed situation.

• It stops creditors enforcing while a solution is negotiated, so nobody has to move first to avoid being last.
• Without it the rational action for any single creditor is to accelerate, and everybody accelerating destroys the value they are competing for.
• It usually comes with information undertakings — the creditors get visibility in exchange for patience.
• It buys the time to do the analysis that decides where the fulcrum is.
• And it is the out-of-court substitute for the automatic stay a court process provides for free.

7. Why does governing law matter so much on a distressed bond?

What it is checking: A detail question that is really about what can be changed and by whom.

• Domestic-law debt can be changed by domestic legislation; foreign-law debt cannot.
• So a sovereign can legislate a collective action clause into its own bonds retrospectively, and cannot do that to a New York-law bond.
• Enforcement differs too: a foreign court's judgement has to be enforced somewhere, and against a sovereign that is nearly impossible directly.
• Which is why the effective route in the best-known case was an injunction working through the payment system rather than against assets.
• For a corporate, governing law decides which insolvency framework and which cram-down mechanism is available at all.

8. Recovery rates: what actually determines them?

What it is checking: Whether the answer is a table from memory or the mechanism behind the table.

• Where the claim sits, first: secured before senior unsecured before subordinated.
• What the security actually covers, and whether it was perfected — a security interest over assets that have since been moved is worth what the drop-down left behind.
• The enterprise value in the restructuring, which is a going-concern number if there is a plan and a liquidation number if there is not.
• The cost of the process, which comes out before anybody recovers anything.
• And the jurisdiction: priority rules, employee and tax preferences and the availability of cram-down all change the answer materially.

1. What does a bank actually do with the money in a current account?

What it is checking: The first question, and it separates people who think a bank stores money from people who know it lends it.

• It lends it. A deposit is not stored; it is a liability of the bank, repayable on demand, and the asset side is loans and securities with much longer lives.
• That mismatch is the business: the bank earns the difference between what it pays for the deposit and what it earns on the loan.
• It is also the risk: every depositor can ask at once and the loans cannot be called in at once.
• Which is why deposit guarantee schemes, liquidity rules and a central bank willing to lend all exist around this one arrangement.

2. Two deposits, same balance, same rate. Why is one worth more to the bank?

What it is checking: Testing whether you know that behaviour, not size, is what prices a deposit.

• Because the value of a deposit is how long it stays and what it costs, not what it is on the day.
• A current account left alone for years is cheap, stable funding; the same balance bought with a headline rate on a comparison site leaves when the rate does.
• Regulators score them differently too: the modelled behaviour feeds the liquidity ratios directly.
• So the honest answer names stickiness, and the honest follow-up is that stickiness is a model rather than a measurement.

3. A customer wants a loan the credit policy declines. What actually happens?

What it is checking: Checking whether you know how much of a retail credit decision is already made before anybody meets the customer.

• Most of it is decided by policy and by a model: affordability, existing commitments, and the record.
• The seat gathers what the model needs, explains the outcome, and works inside a narrow band where judgement is permitted.
• A declined file is not automatically a lost customer, and saying so is part of the job.
• What is not permitted is re-presenting the same case until it passes, which is how portfolios quietly loosen.

4. Explain loan-to-value and affordability to somebody who has confused them.

What it is checking: Two numbers everybody in this business quotes and many people treat as one.

• Loan-to-value asks what is recovered if it defaults: the loan against the value of the security.
• Affordability asks how likely default is: the payment against the income that has to meet it.
• They fail together, which is the point — house prices fall for the same reasons incomes do.
• A book can be conservative on one and reckless on the other, and only one of them is visible in a headline statistic.

5. What happens to a fixed-rate mortgage book when rates rise?

What it is checking: Whether you can apply bond arithmetic to a loan book, which is the same arithmetic with a different name.

• The bank is receiving a fixed rate and funding at a floating one, so the margin compresses unless it was hedged.
• The economic value of the book falls exactly as a bond's price does.
• And prepayment works against the bank in both directions: borrowers repay early when rates fall and stay put when they rise.
• Which is why a fixed-rate book is hedged with swaps rather than simply offered.

6. How would you tell whether a promotional savings rate was worth running?

What it is checking: A product question dressed as a marketing one.

• Compare what the money costs against what the bank would pay to fund itself in the market for the same maturity.
• Then ask what it re-prices: a rate offered to new customers that existing ones can also claim costs the whole book.
• Then ask what stays. Money bought on price leaves on price, so the cost is paid now and the benefit may not arrive.
• The measure is the cohort a year later, not the balances on the day the campaign closed.

7. Why is a run on a bank different from a fall in the value of its assets?

What it is checking: The liquidity-against-solvency distinction, which is easy in a classroom and hard at two in the morning.

• A solvency problem means the assets are worth less than the liabilities: the bank is short of capital.
• A liquidity problem means the assets are worth enough and cannot be turned into cash today: the bank is short of time.
• From outside they look identical, and a liquidity problem can create a solvency one by forcing sales.
• That is why a central bank lends against collateral to institutions it believes are solvent — and why the judgement is difficult.

1. What is the difference between the first, second and third line of defence?

What it is checking: The structural question, and the answer explains why the reporting lines are what they are.

• The first line takes the risk and owns it: the desk, the lending officer, the operations team.
• The second line sets and monitors the constraints: risk management and compliance.
• The third line checks afterwards that the first two worked, and reports to the board rather than to management.
• The independence is structural — reporting line, budget and access — rather than a personal quality.

2. A risk measure says the daily loss should exceed a number on one day in a hundred. It happens four times in a month. What do you conclude?

What it is checking: Whether you can distinguish a model failure from bad luck, and whether you say so.

• Four exceptions in a month is far outside what the model claims, so the first conclusion is that the model is wrong rather than the market unusual.
• The usual causes are a calibration window that contains no stress, correlations assumed stable, or a position the model does not see.
• Backtesting exists precisely to make this visible, and the exceptions are counted rather than debated.
• The response is to widen the measure or reduce the position, and to say which was chosen.

3. Which risk families are hardest to measure, and why does that matter?

What it is checking: The measurement bias that decides which failures firms actually have.

• Market risk has a price history and therefore a number; credit has ratings and spreads.
• Liquidity and operational risk mostly do not: there is no clean distribution for 'we could not sell it' or 'somebody made an error'.
• So firms measure what is measurable, and the risks that decide outcomes are systematically the unmeasured ones.
• Across this site's own product profiles, operational risk decides more instruments than liquidity and funding combined.

4. How does counterparty exposure on a derivative differ from a loan?

What it is checking: A loan's exposure is known at the start; a derivative's is not.

• A loan's exposure is the amount lent, and it amortises down.
• A derivative's exposure is what it would cost to replace, which is zero at inception and grows with the market that made it profitable.
• So the exposure is largest exactly when the trade has been most successful — and often when the counterparty is under most stress.
• Which is why it is collateralised daily rather than lent once.

5. A desk wants a limit raised in a strong year. How do you handle it?

What it is checking: The organisational half of the job, which is most of it.

• Separate the two questions: has the risk changed, or has the appetite changed because the revenue did.
• A limit that moves because a book is profitable is not a limit; it is a ratchet, and it only ever moves one way.
• If it is raised, the reason and the new exposure both go in writing to whoever owns the appetite.
• A second line that cannot survive saying no in a good year has no function in a bad one.

6. What is a control, and how would you tell whether one is real?

What it is checking: The audit question, and it is about evidence rather than intention.

• A control is a step that would catch or prevent the failure, performed by somebody with the standing to stop it.
• It is real if it leaves evidence: an approval, a reconciliation, a rejected item, a record of who did what.
• A documented control with no trace is untested, and an untested control usually turns out not to have been performed.
• Segregation of duties is the oldest one — whoever trades cannot be whoever confirms and records the trade.

7. Why is 'the alert was closed' not the same as 'the alert was reviewed'?

What it is checking: Alert fatigue is the characteristic failure of a surveillance function, and it is a design problem.

• A system that flags thousands of items a day guarantees that each is closed in seconds.
• Closure rates then measure throughput rather than judgement, and the real item is closed at the same speed as the noise.
• The fix is calibration and tiering, not more staff: fewer, better alerts beat more reviewers.
• And the measure of the function is what it found, not how much it processed.

1. Explain a securitisation to somebody who has never heard of one.

What it is checking: The opening question, and the answer has to reach tranching without jargon.

• A lender has thousands of small loans. It sells them to a company created for the purpose, which exists only to hold them.
• That company funds the purchase by issuing notes, and the loans' repayments pay the notes.
• The notes are issued in layers. The bottom layer absorbs the first losses; the top layer is untouched until the bottom is gone.
• So one pool of identical loans becomes several instruments with genuinely different risk, which is the whole trick.
• The originator usually keeps a slice, because post-crisis rules require the party that chose the loans to own some of the outcome.

2. What decides the rating of a senior tranche?

What it is checking: The answer is correlation, and most candidates say credit quality.

• The expected loss on the pool matters, but it is largely absorbed by the subordinate tranches.
• What decides the senior tranche is whether the loans default together — the correlation assumption.
• Low correlation means losses are diversified away and the senior tranche is genuinely remote; high correlation means it is exposed to one common factor.
• That assumption is the least visible thing in the documentation and the most consequential.
• It is what the 2007 to 2009 losses tested, and it is why the whole market was rebuilt around retention and disclosure afterwards.

3. What is the special purpose vehicle for?

What it is checking: It sounds like a formality and it is the structural foundation.

• To hold the assets beyond the reach of the originator's own creditors, so the notes depend on the pool rather than on the seller.
• That rests on a true sale opinion — if the transfer is recharacterised as a secured loan, the assets return to the seller's estate.
• There is a second risk: consolidation, where a court treats the vehicle and the originator as one. Independent directors and restricted activities exist to reduce it.
• Limited recourse and non-petition clauses stop a single creditor putting the vehicle into insolvency and collapsing the waterfall.
• It is a legal opinion about a specific transaction, not a fact about vehicles in general.

4. Why does a bank do a synthetic securitisation?

What it is checking: Capital, and the candidate should say so before mentioning funding.

• To reduce the regulatory capital it must hold against a portfolio, by transferring a defined slice of credit risk.
• The loans stay on the balance sheet: the customer relationship, the servicing and the assets do not move. Only credit exposure does.
• The supervisor has to be satisfied that enough risk genuinely left — significant risk transfer is a test that can be refused.
• The investor is paid for a mezzanine risk on a pool it did not originate and cannot select, so the originator's retained interest is the first thing it reads.
• It is not primarily a funding trade, which is what distinguishes it from a cash securitisation.

5. How does a CLO differ from a static securitisation?

What it is checking: A managed structure behaves differently in a downgrade, and that is the answer.

• It is actively managed: the manager buys and sells loans within a reinvestment period rather than holding a fixed pool.
• It is governed by tests — ratings, diversity, over-collateralisation and interest coverage — that divert cash when they fail.
• So its behaviour under downgrades is mechanical: breaching a test forces action regardless of the manager's view.
• That mechanism is why a wave of downgrades in leveraged loans transmits into forced selling rather than into negotiation.
• And it is why the identity of a loan's holder changes what happens to a stressed borrower.

6. What is an attachment point?

What it is checking: A precision question. Answering it with two numbers rather than a description is the differentiator.

• The pool loss level at which a tranche starts taking losses; the detachment point is where it is wiped out.
• A tranche attaching at 3% and detaching at 7% is a four-point-wide claim on a much larger pool.
• Width matters as much as position: a thin mezzanine tranche is close to binary, while a wide senior one is not.
• The same expected loss can therefore sit in two tranches with completely different distributions.
• Which is why an expected-loss rating and a probability-of-default rating say different things about the same slice.

7. What is the borrowing base in a receivables facility?

What it is checking: Asset-based lending in one number, and it is a good test of whether somebody has seen a facility.

• Take the sales ledger, remove the ineligible invoices — past a concentration limit, overdue, disputed, related party, wrong jurisdiction.
• Take a dilution reserve off what is left, for credits and returns that reduce invoices without anybody defaulting.
• Apply the advance rate to the remainder. That is the borrowing base, and it is what may be drawn.
• The base is recalculated regularly, so it falls when the ledger falls — which is exactly when the borrower needs it most.
• What counts as ineligible is defined in the facility agreement, and that definition moves the number far more than the advance rate does.

8. Why did risk retention become a rule?

What it is checking: A regulatory question that has a clean incentive answer.

• Before it, an originator could select loans, sell all of the resulting risk, and keep only the fee.
• That separates the party choosing the loans from the party bearing the outcome, which is the definition of a moral hazard.
• Retention requires the originator to keep a slice — commonly a defined proportion, in one of several permitted forms.
• The intent is alignment rather than protection: the slice is too small to make an investor whole and large enough to matter to the originator.
• It arrived on both sides of the Atlantic in the years after the crisis and is now part of what makes a securitisation compliant at all.

1. How is a corporate hedge different from a trading position?

What it is checking: The distinction the whole seat rests on, and the answer is about where the exposure came from.

• A trading desk takes a position on purpose and hedges to flatten a risk it chose.
• A treasury hedges a risk the operating business produced by selling in another currency or borrowing at a floating rate.
• The aim is a known cash flow rather than a good outcome, which is why the policy is written down and approved by a board.
• A view taken because the market looked wrong is a position nobody authorised, however well it works.

2. A hedge was economically right and nearly destroyed the company. How?

What it is checking: The timing mismatch, which is the single most instructive failure in corporate treasury.

• The hedge moved against the company in the short run and produced margin calls in cash.
• The offsetting gain sat in an exposure that would only be realised over years, and did not pay anything today.
• So the position was correct and unfundable, which is a liquidity failure rather than a hedging one.
• Which is why any hedging policy has to model the collateral profile, not only the economic offset.

3. What does 'trapped cash' mean and why does it matter?

What it is checking: A consolidated balance is not a usable balance, and this is where treasurers actually live.

• Cash sitting in a subsidiary that cannot legally or practically move to where it is needed — capital controls, tax, minority shareholders, local requirements.
• The group balance sheet shows one total; the treasury sees a set of pools with walls between them.
• So liquidity is a question about location and timing rather than about the sum.
• And a company can be comfortable in aggregate and unable to pay something on time.

4. Why would a company issue a bond rather than draw on a bank facility?

What it is checking: Whether you can compare two ways of borrowing from the borrower's side rather than the bank's.

• Tenor: bonds reach maturities banks will not lend at, and without amortisation.
• Covenants: bond documentation is usually lighter, and the lenders are dispersed rather than in one room.
• Cost and capacity vary with the market, and the bank facility is often kept undrawn as a backstop precisely because it is committed.
• The trade is flexibility: a bank can be renegotiated, hundreds of bondholders largely cannot.

5. What is investor relations actually constrained by?

What it is checking: It looks like communications and it is governed by disclosure law.

• Anything that would move the price has to reach everybody at once; a fact given to one investor in a meeting and not to the market is a legal problem.
• So the seat can explain and contextualise what has been disclosed, and cannot add to it privately.
• That is what shapes the calendar: results, then a defined period of meetings, then a quiet period.
• The test is what a reasonable investor would use, not what feels important internally.

6. A company beats last year's earnings and the shares fall. Explain it to the chief executive.

What it is checking: Expectations against outcomes, from the side of the company rather than the investor.

• The market prices what it expected, and the consensus had already moved past last year.
• So the comparison that moves the price is against the expectation, not against the prior period.
• Guidance is part of what set that expectation, which is why giving it is a commitment rather than a courtesy.
• And the durable fix is a consensus that tracks the business, which is this seat's actual measure.

7. Why does a company care about its credit rating even if it is not issuing?

What it is checking: A rating is a constraint on the business, not only on the funding cost.

• It sets the price and the availability of the next borrowing, including the committed facilities already in place.
• Contracts reference it: some counterparties require collateral or a guarantee below a threshold.
• It affects what customers and suppliers will do on credit terms, which is an operating question rather than a financing one.
• So a rating is defended with balance sheet decisions long before any issuance is planned.

1. Walk me through a DCF.

What it is checking: The most-asked question in corporate finance. The answer is standard; what is graded is whether you flag the terminal value.

• Project unlevered free cash flow for an explicit period — operating profit after tax, plus depreciation, minus capex, minus the change in working capital.
• Discount those at the weighted average cost of capital to get their present value.
• Add a terminal value, either a perpetuity growth formula or an exit multiple, discounted back.
• That gives enterprise value. Subtract net debt and other claims to reach equity value, then divide by the share count.
• The part to say without being asked: the terminal value is usually most of the answer, and it depends on two numbers nobody can observe.

2. Which of your inputs matters most, and how would you show it?

What it is checking: The follow-up that separates people who have built models from people who have read about them.

• The discount rate and the terminal growth rate, because the terminal value is the largest component and both feed it directly.
• The way to show it is a sensitivity table across plausible ranges of both, not a single number to two decimal places.
• A range with explicit assumptions says what is known; a point estimate says the opposite of what it appears to say.
• Cash flow definitions are the quieter risk — whether leases, capitalised development and working-capital swings are in or out changes the answer more than the discount rate does.
• So the honest deliverable is a range plus a statement of which assumption moves it.

3. Why is enterprise value used rather than market capitalisation?

What it is checking: A definitional question that catches a very common error in practice.

• Enterprise value is what the whole business costs, independent of how it is funded — equity plus net debt, plus minorities and other claims.
• Market capitalisation only prices the equity, so two identical businesses with different leverage are not comparable on it.
• Which is why an EV multiple must go over a pre-interest measure like EBIT or EBITDA, and an equity multiple over a post-interest one like net income.
• Mixing the two is the most common error in comparables work, and it always flatters the levered company.
• The bridge between them — debt, cash, minorities, pensions, associates — is where most arguments about what a buyer paid actually live.

4. Two companies, same sector, very different multiples. Why?

What it is checking: Whether the candidate reaches for a story or works through the drivers.

• Growth: a higher expected growth rate justifies a higher multiple on the same earnings.
• Returns: a business that grows without much capital is worth more than one that needs capital to grow.
• Risk: different cost of capital, different earnings volatility, different customer concentration.
• Accounting: the two may not define the metric the same way — capitalised costs, leases, one-off items.
• And the boring possibility that is right surprisingly often: the peer set is wrong, and they are not actually in the same business.

5. How would you choose the peer set?

What it is checking: Because the selection is the analysis, and almost nobody defends it in writing.

• Start from the business model rather than the sector code — what the company sells, to whom, and how the money arrives.
• Then screen on size, growth, margin and geography, because a multiple is a claim that these companies are alike in the ways that price them.
• Say out loud which comparables you excluded and why. Adding or removing two moves a median more than any adjustment made afterwards.
• Use a median rather than a mean, because one outlier otherwise sets the answer.
• And check the direction of the bias your set creates — a set chosen after the answer is known is not evidence.

6. Precedent transactions give a higher multiple than trading comparables. Why?

What it is checking: The control premium, plus two effects most candidates miss.

• Precedents are prices paid for control, which carries a premium over a minority stake in the market.
• They frequently include synergies the buyer paid for, so the multiple reflects the buyer's combined business rather than the target alone.
• They are historic, so they carry the rate environment and the competitive tension of their date.
• And there is a selection effect: transactions happen when a buyer is willing, which is not a random sample of the sector.
• So a precedent multiple is a fact about that transaction, in that year, not a valuation of this company today.

7. What does a fairness opinion actually say?

What it is checking: One of the most misread documents in finance, and the precise answer is short.

• That the consideration is fair, from a financial point of view, to a specified group of holders, as of a specified date.
• It is addressed to the board, not to shareholders, and it is a decision aid for directors rather than a recommendation to anyone voting.
• It does not say the price is the highest obtainable, and it does not opine on the merits of doing the deal at all.
• Its assumptions are load-bearing and listed: management forecasts relied on without independent verification, no undisclosed liabilities, completion on the stated terms.
• The practice became near-universal after a 1985 Delaware decision holding a board liable for approving a sale without adequate information.

8. When is a sum-of-the-parts valuation useful, and when is it a trap?

What it is checking: The most flexible method there is, which is exactly the warning.

• Useful when divisions are genuinely different businesses that the market prices on different measures, and the group discount is real.
• You value each division on its own peer set, add them, then subtract central costs, net debt and any conglomerate discount.
• The trap is that choosing a different peer set per division can make almost any total come out — it is the easiest analysis in finance to reverse-engineer.
• Central costs and stranded costs are routinely understated, because they are the least visible line.
• And a separation has its own cost and takes years, so a theoretical sum is not a price anybody can realise on Monday.

1. How is advising a household different from running an institutional mandate?

What it is checking: The opening question, and the answer is not 'smaller'.

• An institution has a written objective, a horizon and a governance process; a household has whatever it decided its money is for.
• Both sides of the balance sheet are in scope: property, a business, borrowing against the portfolio.
• Tax, succession and jurisdiction change what is worth holding, not just what it is worth.
• And the client is the one who panics, which is a risk factor an institutional mandate does not have.

2. What is the difference between advice and discretion, and why does it matter?

What it is checking: A legal distinction that changes what the seat can and must do.

• Under advice the client decides, so the client has to understand — the recommendation must be explicable and the understanding established.
• Under discretion the manager decides within a mandate and reports afterwards.
• So a discretionary manager can hold something the client would never have chosen and be entirely within the mandate; an adviser cannot.
• Which is why the advisory file — what was recommended, why, and what was explained — is the substance rather than the paperwork.

3. A client has most of their wealth in the company they founded. How do you frame it?

What it is checking: The most common situation in this seat, and it is not solved by saying 'diversify'.

• Name it as a decision: holding is a choice made again every day, not a neutral default.
• Separate the questions — what the household needs to be safe, and what it is willing to leave concentrated.
• Then the mechanisms, each with a cost: selling in stages, borrowing against it, or hedging where the instrument exists.
• And the constraints that decide which are available: tax, lock-ups, insider rules and the client's own role in the company.

4. Why is lending against a portfolio riskier than it looks?

What it is checking: The correlation between the collateral and the reason for the call.

• The loan is fixed and the collateral moves, so the loan-to-value rises exactly when markets fall.
• The call then arrives at the worst moment and is met by selling into the fall.
• So the sale is forced rather than chosen, which converts a paper loss into a realised one.
• The mitigation is headroom sized for a real drawdown, not for an average one.

5. Risk tolerance and risk capacity — what is the difference?

What it is checking: Two things a suitability questionnaire often merges into one score.

• Tolerance is what somebody can bear to watch: a preference, and an unreliable one measured in a calm market.
• Capacity is what their circumstances can absorb: time horizon, other income, commitments.
• They frequently point opposite ways — somebody nervous with decades ahead, or somebody relaxed who needs the money in two years.
• The file has to record both and say which constrained the outcome.

6. What should a family office do first?

What it is checking: Whether you know that governance precedes investing here.

• Write down what the money is for and who decides what — an investment policy anybody can act on.
• Without it every decision is re-argued from first principles at the worst moment, and the office becomes whoever spoke last.
• Then consolidated reporting, which sounds trivial and is the hardest operational task in the office.
• Only then allocation, because the allocation is an answer to a question the first two steps ask.

7. Why do total costs matter more here than almost anywhere?

What it is checking: Long horizons and layered structures, compounding in the wrong direction.

• The horizon is a lifetime or longer, so a small annual difference compounds into a large one.
• The structures are layered — a wrapper, a fund of funds, an underlying manager — and each layer charges.
• Much of it is not on a statement: spreads, custody, currency conversion, product margin inside a structure.
• Which is why the honest number is total cost in money, stated for the whole arrangement rather than per component.