finance Interview Questions

The interview Q’s:

1. Buy Call / Sell Put 2. Credit rating Agencies 3. Recon files how many not matching 4. OTC securities 5. Forwards 6. Futures 7. LIBOR A. London Interbank Offer Rate 8. Lend money 1 day ? What is it called term , notice or call money? A. Call Money 9. SWIFT - Society for Worldwide Interbank Financial Telecommunication" 10. Options 11. Loss of Option Writer? A. Unlimited 12. What is Repo Agmt? A. Repurchase Agmt 13. CUSIP? 14. Arbitrage 15. Bond Price fall/increase as per int rate Interview 1. Run me thru your CV 2. What work did you do at your previous orgn? 3. Key learnings at your previous organization 4. Family Background 5. Capital Mkts tell me abt it 6. Bond Market? 7. Which are the various types of Risks? 8. What is Financial / Operational Risk? 9. Y do investors prefer bonds? 10. What r debentures? 11. What is the difference between bonds and debentures? 12. What is Inflation in India? 13. What is the inflation % in India? 14. What are the measures to tackle inflation? (I ansd reductn in CRR / SLR) 15. What is CRR & SLR? Who monitors it? 16. What is an IPO? 17. What happens if an IPO is undersubscribed? 18. Who r underwriters? 19. What is FDI? Can foreign companies do an IPO in India? Y would they do that? (due to interest) 20. What are derivatives? (Futures, options , swaps) 21. What is an interest Rate Swap? 22. What is an embedded option?

23. Can an option be underwritten? (No) 24. Y did u leave JP? 25. R u willing to work all day t ill late at night? 26. Difference betwn Futures n Forwards? Next Round 1. Run me through your CV 2. Tell me about yourself. Family. 3. What is NPV? 4. IRR 5. Yield 6. How is bond price affected by yield? 7. Will a bond that is 10 years o ld or a bond that is 20 years have a higher price / discounting? 8. What is Cost of Capital? 9. Debt / Equity Ratio 10. What choice does a company make only debt / only equity? 11. What is Debt Equity ratio? 12. Y would companies issue a bond instead of shares? 13. Which is costlier? Y? 14. Which is the most costly form of financing? 15. Apart from college what do you do? 16. Willing to travel to any location? 17. R u comfortable with working in a KPO? 18. Would you sign a bond.

Definition of  'Net Present  Value - NPV' The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield. Formula:

In addition to the formula, net present value can often be calculated using tables, and spreadsheets such as Microsoft Excel.

Investopedia explains 'Net Present Value - NPV' NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative. For example, if a retail clothing business wants to purchase an existing store, it would first estimate the future cash flows that store would generate, and then discount those cash flows into one lump-sum present value amount, say $565,000. If the owner of  the store was willing to sell his business for less than $565,000, the purchasing company would likely accept the offer as it presents a positive NPV investment. Conversely, if the owner would not sell for less than $565,000, the purchaser would not buy the store, as the investment would present a negative NPV at that time and would, therefore, reduce the overall value of the clothing company http://www.investopedia.com/terms/n/npv.asp

What is NPV discounting?  Answer:  Npv is the net present value of cash flows.The npv is a method of calculating whether a project is worth while based on its initial investment and the returns that will be received.Cash flows can be considered an amount of money which will flow into or out of the business.

In the commercial world we can not just look at the values and assume that the same amount of money you invest in this project can for example be put into a  bank and you will have a guaranteed amount of money from this. This is considered to be the time value of money, this is also the reason that we reduce the cash flows to the net present value to give a fair view of the cash flows.

The % we can receive from the bank is considered to be the cost of capital e.g 7%

So we then use this formulae to calculate the npv So the first cash outflow is not discounted as this is the beginning so technically

no money could be invested anywhere. We then take the cash flow from the first year:

Cash inflow : £1000 * (100%-7%)

http://wiki.answers.com/Q/What_is_NPV_discounting

http://www.onemint.com/2010/11/23/what-is-irr-and-how-is-itcalculated/

 What is IRR and how is it calculated? by MANSHU on NOVEMBER 23, 2010 in INVESTMENTS IRR stands for Internal Rate of Return, and last week reader Sandeep emailed me asking about this, so I thought I’d do a post on the subject. It’s impossible to understand IRR without understanding the concept of Net Present Value (NPV) first, so let’s begin with NPV.  You know that the cash that you receive today is more valuable than the cash you receive two years down the line or anytime in the future due to inflation. So, anytime you see cash flows going out in the future  you will ask yourself how much is all this money worth today? We are all familiar with this concept because we see it every day in our life, and is relevant to a lot of things especially retirement planning, and looking at things such as how much money you will need for retirement. So let’s say I come to you with a proposal for a project and say that  you invest Rs. 1 million in the beginning and after that the project will start generating cash without any further investment, and here is how  the cash flows will look like.

Time Period

Project A

0

(1,000,000.00)

1

450,000.00

2

400,000.00

3

350,000.00

4

300,000.00

5

250,000.00

Since it’s me you’d say why did I go through all this trouble of digging up the numbers; take out your check book, and write me a check  – thank you! But imagine for a moment, it was a family member – you would be on  your guard then wouldn’t you?  You would obviously want to know if this is a better deal than what  your bank gives you, and for that you can calculate the Net Present  Value of these cash flows on the rate of interest your bank gives you  which is also called the Discount Rate for this purpose. Let’s assume that the discount rate is 8% in this case. To calculate the NPV of this project you will discount each cash flow   with the discount rate keeping in mind the time lapse.  Your calculations will look something like this. Time Period (T)

Project A

Discount Rate (DR)

DR + 1

(DR + 1) ^ T

NPV of Cash Flow{Cash Flow

/ (DR +1)^T} 0

(1,000,000.00) 0.08

-

-

(1,000,000.00)

1

450,000.00

0.08

1.08

1.08

416,666.67

2

400,000.00

0.08

1.08

1.17

342,935.53

3

350,000.00

0.08

1.08

1.26

277,841.28

4

300,000.00

0.08

1.08

1.36

220,508.96

5

250,000.00

0.08

1.08

1.47

170,145.80

NPV

428,098.23

 An NPV of more than 0 means that you will make more than your alternative investment (the fixed deposit) in your case, so looking at this number makes you really happy. To sum up – NPV is the sum of all cash flows at a discount rate that represents your alternative investment potential.  What is IRR?

Internal Rate of Return (IRR) is that rate of return at which the NPV  from the above investments will become zero. It is that rate of interest that makes the sum of all cash flows zero, and is useful to compare one investment to another. In the above example if you replace the 8% with a 25% the NPV will  become zero, and that’s your IRR. Hence, the statement that IRR is the discount rate at which the NPV of a project becomes zero. How did I know that the I need to use 25%? I used the Excel formula called IRR  to find that out. Manually, you will have to do a bit of a hit and trial to arrive at that, and if you have Excel handy then that’s the easiest way  to calculate IRR.

Input your cash flows, select IRR from formulas, and get the result. This link explains how to calculate IRR using Excel. Time

Project A

IRR

IRR + 1

(IRR + 1) ^ T NPV of Cash

Period

Flow

0

(1,000,000.00) 0.25

-

-

(1,000,000.00)

1

450,000.00

0.25

1.25

1.25

360,000.00

2

400,000.00

0.25

1.25

1.56

256,000.00

3

350,000.00

0.25

1.25

1.95

179,200.00

4

300,000.00

0.25

1.25

2.44

122,880.00

5

250,000.00

0.25

1.25

3.05

81,920.00

Total of 

0

Cash Flows

The IRR is useful if you have to compare with one project with another that has different cash flows at different times. So, to add to our example – let’s say you are presented with the following two options to invest your money in – which project will you choose? Time Period

Project A

Project B

0

(1,000,000.00)

(1,000,000.00)

1

450,000.00

250,000.00

2

400,000.00

300,000.00

3

350,000.00

450,000.00

4

300,000.00

450,000.00

5

250,000.00

450,000.00

Quick mental calculation will show you that the cash flows from the second project exceed the first one, but you also notice that they do’t exceed by much and are also at later years, so it might be worth your time to calculate the IRR. In this case the IRR is 22.99% as shown by  the table below because that is the discount rate at which the NPV   becomes zero, or close to zero in this case due to rounding errors. Time

Project A

IRR

IRR + 1

(IRR + 1) ^ T NPV of Cash

Period

Flow

0

-1000000

0.23

-

-

(1,000,000.00)

1

250000

0.23

1.2299

1.23

203,268.56

2

300000

0.23

1.2299

1.51

198,326.91

3

450000

0.23

1.2299

1.86

241,881.75

4

450000

0.23

1.2299

2.29

196,667.82

5

450000

0.23

1.2299

2.81

159,905.54

Total of 

51

Cash Flows

 Your new information tells you that one project has an IRR of 25%  while the other has an IRR of 23% so that gives you more information to make your decision from. So, this is the way IRR helps you in making a decision when comparing different projects, and is one of the several tools that can  be used in evaluating any project that has cash flows distributed over the years. To learn more about this concept head over to this link which does a great job of explaining IRR and getting into the details also. and leave a comment if you have any questions or clarifications, or juts see an

error somewhere.

Investopedia explains 'Internal Rate Of Return IRR' You can think of IRR as the rat e of growth a project is expected to generate. While the actual rate of return that a given project ends up generating will often differ from its estimated IRR rate, a project with a substantially higher IRR value than other available options would still provide a much better chanc e of strong growth. IRRs can also be compared against prevailing rates of return in the securities market. If a firm can't find any projects with IRRs greater than the returns that can be generated in the financial markets, it may simply choose to invest its retained earnings into the market.

Definition of 'Internal Rate Of Return - IRR' The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of  return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first. IRR is sometimes referred to as "economic rate of return (ERR)."

What is IRR & how to calculate it?

India Infoline News Service / 16:05 , Oct 22, 2012 The internal rate of return is usually used to calculate the profitability of investment made in a financial product or projects

You invest a certain amount every year in some financial instruments like mutual funds, ULIPs, etc. After five, 10 years or 15 years, you may want to redeem your investments. At that time, we usually calculate the money which we originally invested with the maturity amount that we received to understand how much did we gain. But do you think this is the right method to check how much did we gain? We need to know how much return we got on our investments. This requires some basic calculations. Let’s try to understand the concept of IRR or internal rate of return. What is NPV? It’s impossible to understand the concept of IRR without understanding net present value (NPV), so let’s begin with NPV. The cash that we have today is more valuable than the cash that we will receive after five years due to inflation. Hence, when you decide to invest money each year, you need to first check how much that money is worth today. This is called net present value of money.  Assume your friend tells you about a project ‘A’ in which you invest Rs. 10 lakh today and from next year the project will start generating cash flows without any further investment. The below table provides information on the money invested today and the cash flows generated in future. Number of years & cash flows Period

Project A

Today

Rs. -10 lakh

Year 1

Rs. 2 lakh

Year 2

Rs. 3 lakh

Year 3

Rs. 3 lakh

Year 4

Rs. 3.5 lakh

Year 5

Rs. 3.5 lakh

Total of cash flows

Rs. 15 lakh

You surely want to know whether project ‘A’ is worth investing, than depositing money with banks. To compare benefits, you need to find out the net present value (NPV) of these cash flows. Assume IRR is around 8% for project ‘A’. IRR is also called discount rate. To calculate NPV of this project, discount each cash flow with IRR keeping in mind the time lapse. The formula to compute NPV is cash flow / discount rate + 1^N. The term ‘N’ stands for the number of years Compute NPV Period

Project A

Discount rateNPV* (Rs)

Today

Rs. -10 lakh

8%

(10 lakh)

Year 1

Rs. 2 lakh

8%

1,85,185

Year 2

Rs. 3 lakh

8%

2,57,202

Year 3

Rs. 3 lakh

8%

2,38,150

Year 4

Rs. 3.5 lakh

8%

2,57,260

Year 5

Rs. 3.5 lakh

8%

2,38,204

Total of cash flows

11,76,001

NPV =Cash flow / discount rate +1^N

The above table shows that project ‘A’ has an NPV of Rs. 11.76 lakh, while you are investing Rs. 10 lakh today. This shows that the project ‘A’ is not worth investing as the value of its cash flows today is Rs. 11.76 lakh —which is Rs. 1.76 lakh extra than what you are investing today (Rs. 10 lakh). NPV should always be more than zero i.e. the project is giving us more returns than the money invested today. What is IRR? Internal rate of return or IRR is that rate of return at which NPV from the above investment & cash flows will become zero. IRR is the rate of interest that makes the sum of all cash flows zero, and is useful to compare one investment to another. In the above example, if we replace 8% with 13.92%, NPV will become zero, and that’s your  IRR. Therefore, IRR is defined as the discount rate at which the NPV of a project becomes zero. How to evaluate NPV

Period

Project A

Discount rate

NPV (Rs)

Today

Rs. -10 lakh

13.92%

(10 lakh)

Year 1

Rs. 2 lakh

13.92%

1,75,569

Year 2

Rs. 3 lakh

13.92%

2,31,184

Year 3

Rs. 3 lakh

13.92%

2,02,944

Year 4

Rs. 3.5 lakh

13.92%

2,07,846

Year 5

Rs. 3.5 lakh

13.92%

1,82,457

Total of cash flows

10 lakh

How to calculate IRR? To understand why 13.92% is taken as the interest rate, we need to find the IRR. In an Excel sheet, first enter the original amount invested. The amount invested should be represented by a ‘minus’ sign. In each cell enter the cash flows which received each year. Remember to include the ‘minus’ sign whenever you invest money. Now find out IRR by mentioning =IRR(values,guess).

Compute IRR on Excel No. of years

Project A

Today

-1000000

Year 1

200000

Year 2

300000

Year 3

300000

Year 4

350000

Year 5

350000

IRR

14%

IRR is the interest rate received for an investment consisting of money invested (negative value) and cash flows (positive value) that occur at regular periods. Please note The numbers included should be a set of positive and n egative values 

The last value is the amount you receive  Any amount invested will be negative so if you invest Rs. 1,000, mention -1000 The amount which you get at the end will be positive. If you get Rs. 5,000, mention  +5000  All investments made are done at regular intervals. For instance: investments are  st th made on the 1 or 15 of every year    All the payments are assumed to be made annually. IRR is usually used to calculate the profitability of investments made in a financial product or  projects. Higher the IRR, the more profitable it is to invest in a financial scheme or project.  Assume all financial products require the same amount of up-front investment, the product with the highest IRR would be considered the best. Of course, one also needs to understand the risk factors before investing.  

http://www.indiainfoline.com/PersonalFinance/Articles/What-isIRR-and-how-to-calculate-it/37928429