Essential Financial Concepts for Interviews
Prepare to discuss various fundamental and advanced topics, including:
- Introduction to Financial Management
- Finance Case Studies
- Financial Accounting
- Financial Risk Analytics
- Analytics in Finance
- Introduction to Corporate Finance
Top 35+ Finance Interview Questions
- What is Finance?
- What do you understand by working capital?
- What is a cash flow statement? Explain.
- Can a company show positive net income and yet go bankrupt?
- What is hedging? Explain.
- What is preference capital?
- What do you understand by fair value?
- What is RAROC?
- What is the secondary market?
- What is cost accountancy? What are its objectives?
- What is a put option?
- What are adjustment entries? How can you pass them?
- What is Deferred Tax Liability?
- What is goodwill?
- How can we calculate WACC (weighted average cost of capital)?
- What is investment banking?
- What are derivatives?
- What does an inventory turnover ratio show?
- What is ROE or return on equity?
- What is SENSEX and NIFTY?
- What are EPS and diluted EPS?
- What are swaps?
- What is financial risk management?
- What is deferred tax liability and assets?
- Understanding Cash Equivalents
- What is liquidity?
- What do you understand by leverage ratio and solvency ratio?
- What is an NPA?
- What is a dividend growth model?
- What do you understand about loan syndication?
- What is capital budgeting? List the techniques of capital budgeting.
- What is a payback period?
- What is a balance sheet?
- What is a bond? What are the types of bonds?
- Can you explain the difference between equity and debt financing?
- How would you calculate the weighted average cost of capital (WACC)?
- What is your experience with financial modeling?
- Can you explain the concept of net present value (NPV)?
- How would you analyze a company’s financial statements?
- Can you explain the difference between a forward contract and a futures contract?
- How do you calculate the price-to-earnings (P/E) ratio?
- Can you explain the concept of cost of capital?
- What are debentures?
Answers Of Top 35+ Finance Interview Questions
1. What is Finance?
Finance encompasses a wide range of activities including banking, debt, credit, capital markets, money, and investments. At its core, finance involves managing money and securing necessary funds. Financial systems deal with money, banking, credit, investments, assets, and liabilities. There are three main types of finance:
1. Personal finance
2. Corporate finance
3. Government finance
2. What do you understand by working capital?
Working capital, also known as net working capital (NWC), is the difference between a company’s current assets and current liabilities. Current assets include cash, accounts receivable, and inventory, while current liabilities include accounts payable and short-term debt. Working capital is crucial for assessing a company’s financial health.
3. What is a cash flow statement? Explain.
A cash flow statement is an important tool for managing finances and tracking an organization’s cash flow. It provides insights into the sources and uses of cash, including operating, investing, and financing activities. Cash flow statements help managers make informed decisions about managing corporate operations effectively.
4. Can a company show positive net income and yet go bankrupt?
Yes, a company can have positive net income and still face bankruptcy. This can happen due to cash flow issues where expenses exceed incoming cash. Even with positive net income, a company may struggle if its debts outweigh its assets.
5. What is hedging? Explain.
Hedging is a risk management strategy that involves taking offsetting positions to minimize losses. It often involves paying a premium for protection against adverse price movements. Derivatives like futures and options contracts are commonly used in hedging strategies.
6. What is preference capital?
Preference capital refers to the portion of capital raised through the issuance of preference shares. These shares have characteristics of both equity and debt, providing shareholders with priority in dividend payments over common stockholders.
7. What do you understand by fair value?
Fair value refers to the current market price of an asset or liability. It represents a reasonable price for the asset or liability in a fair transaction between willing buyers and sellers. Fair value is crucial for assessing asset worth during acquisitions or sales.
8. What is RAROC?
The risk-adjusted return on capital (RAROC) is a risk-adjusted return on investment measurement. RAROC is one of the most accurate techniques for determining a bank’s profitability. Expected returns may be computed using a more informed method that includes the determined economic capital and risk exposure.
Banks employ RAROC, among other tools, to control risks, particularly those arising from their lending operations, for successful risk management. This is frequently computed in the following way:
RAROC = (Revenues – Costs – Expected Losses) / Economic Capital
9. What is the secondary market?
The secondary market is where securities are traded after their initial issuance in the primary market. Investors buy and sell securities among themselves, and prices are determined by market demand and supply.
10. What is cost accountancy? What are its objectives?
Cost accountancy involves recording, classifying, and allocating expenditures related to production. Its objectives include determining the cost of goods and services accurately to support decision-making.
11. What is a put option?
A put option is a contract that gives the buyer the right to sell a specified quantity of an underlying asset at a predetermined price within a set period. It allows investors to profit from a decline in the asset’s price.
12. What are adjustment entries? How can you pass them?
Adjustment entries are entries that are passed at the end of the accounting period to adjust the marginal and other accounts so that the correct net profit or net loss is shown in the profit and loss account, and the balance sheet can also portray the true and fair view of the business’s financial condition.
Before preparing final statements, these adjustment entries must be passed. Otherwise, the financial report would be deceptive, and the balance sheet will not reflect the genuine financial status of the company.
13. What is Deferred Tax Liability?
A deferred tax liability represents taxes that a company owes but is not yet due for payment. It arises due to timing differences between when taxes are accrued and when they are paid.
14.What is goodwill?
Goodwill is an intangible asset associated with the acquisition of a business. It represents the excess of the purchase price over the fair value of net assets acquired.
15. How can we calculate WACC (weighted average cost of capital)?
The weighted average cost of capital (WACC) is a figure that represents the average cost of capital for a company. Long-term obligations and debts, such as preferred and ordinary stocks and bonds, that corporations pay to shareholders and capital investors, are examples of capital expenses.
Rather than calculating capital expenses, the WACC takes a weighted average of each source of capital for which a firm is responsible.
WACC = [(E/V) x Re] + [(D/V) x Rd x (1 – Tc)]
E = equity market value
Re = equity cost
D = debt market value
V = sum of the equity and debt market values
Rd = debt cost
Tc = Current tax rate – corporations
16. What is investment banking?
Investment banking involves raising funds for individuals and businesses and providing financial advice. It facilitates capital raising through activities like initial public offerings (IPOs) and mergers and acquisitions.
17. What are derivatives?
Derivatives are financial contracts whose value is derived from an underlying asset. They include options, futures, and swaps, and are used for hedging and speculation.
18. What does an inventory turnover ratio show?
The time it takes for an item to be acquired by a corporation to be sold is referred to as inventory turnover. A full inventory turnover indicates the firm sold all of the merchandise it bought, minus any items lost due to damage or shrinking.
Inventory turnover is common in successful businesses, however it varies by sector and product type.
19.What is ROE or return on equity?
The Return On Equity (ROE) ratio effectively assesses the rate of return on a company’s common stock held by its shareholders. The company’s ability to generate returns for investors it acquired from its shareholders is measured by its return on equity.Investors choose companies with larger returns on investment.
This can, however, be used as a standard for picking stocks within the same sector. Profit and income levels differ dramatically among industries. Even within the same industry, ROE levels might differ if a business decides to pay dividends rather than hold profits as idle capital.
20. What is SENSEX and NIFTY?
Sensex and Nifty are stock market indexes, whereas BSE and NSE are stock exchanges. A stock market index is a real-time summary of the market’s moves. A stock market index is built by combining stocks of similar types.
The Bombay Stock Exchange’s stock market index, known as the Sensex, stands for ‘Stock Exchange Sensitive Index.’ The Nifty is the National Stock Exchange’s index and stands for ‘National Stock Exchange Fifty.’
21. What are EPS and diluted EPS?
Only common shares are included in earnings per share (EPS), whereas diluted EPS includes convertible securities, stock options, and secondary offerings.EPS is a metric that quantifies a company’s earnings per share. Basic EPS, unlike diluted EPS, does not take into account the dilutive impact of convertible securities on EPS.
In fundamental analysis, diluted EPS is a statistic that is used to assess a company’s EPS quality after all convertible securities have indeed been exercised. All existing convertible preferred shares, debt securities, stock options, and warrants are considered convertible securities.
22. What are swaps?
Both investors and traders utilize derivatives contracts as one of the greatest diversification and trading instruments. It may be separated into two types according to its structure: contingent claims, often known as options, and forward asserts, such as exchange-traded futures, swaps, or forward contracts.
Swap derivatives are efficiently utilized to exchange obligations from these groups. These are contracts in which two parties agree to exchange a series of cash flows over a set period of time.
23. What is financial risk management?
Financial risk management is the process of identifying and addressing financial hazards that your company may face now or in the future. It’s not about avoiding risks since few organizations can afford to be completely risk-free.
It’s more about putting a clear line. The goal is to figure out what risks you’re willing to face, which dangers you’d rather avoid, and how you’ll design a risk-averse approach.
24. What is deferred tax liability and assets?
A deferred tax asset (DTA) is a balance sheet item that shows a discrepancy between internal accounting and taxes owing. Because it is not a physical entity like equipment or buildings, a deferred tax asset is classified as an intangible asset. Only on the balance sheet does it exist.
A deferred tax obligation (DTL) is a tax payment that is recorded on a company’s balance sheet but is not due until a later tax filing.
25. Understanding Cash Equivalents
Legal currency, banknotes, coins, cheques received but not deposited, and checking and savings accounts are all examples of cash. Any short-term investment security having a maturity time of 90 days or less is considered a cash equivalent.
Bank certificates of deposit, banker’s acceptances, Treasury bills, commercial paper, and other money market instruments are examples of these products.
Due to their nature, cash and its equivalents vary from other current assets such as marketable securities and accounts receivable.
26.What is liquidity?
Liquidity refers to how soon you can receive your money. To put it another way, liquidity is the ability to obtain your money whenever you need it. Liquidity could be your backup savings account or cash on hand that you can use in the event of an emergency or financial catastrophe.
Liquidity is also crucial since it helps you to take advantage of chances. If you have cash on hand and ready access to funds, it will be simpler for you to pass up a good chance. Liquid assets are cash, savings accounts, and checkable accounts that can be readily turned into cash when needed.
27. What do you understand by leverage ratio and solvency ratio?
A leverage ratio is one of numerous financial metrics used to evaluate a company’s capacity to satisfy its financial commitments. A leverage ratio may also be used to estimate how changes in output will influence operating income by measuring a company’s mix of operating costs.
Solvency ratios are an important part of financial analysis since they assist in determining if a firm has enough cash flow to meet its debt commitments. Leverage ratios are another name for solvency ratios. It is thought that if a company’s solvency ratio is low, it is more likely to be unable to meet its financial obligations and to default on debt payments.
28. What is an NPA?
Financial institutions classify loans and advances as non-performing assets (NPAs) if the principle is past due and no interest payments have been paid for a certain length of time. Loans become non-performing assets (NPAs) when they are past due for 90 days or more, while other lenders have a narrower window in which they consider a loan or advance past due.
29. What is a dividend growth model?
The dividend yield is a valuation model that determines the fair value of a stock by assuming that dividends grow at a constant rate in perpetuity or at a variable rate over the time period under consideration. The dividend growth model assesses if a company is overpriced or undervalued by subtracting the necessary rate of return (RRR) from the projected dividends
30. What do you understand about loan syndication?
A syndicated loan is provided by a group of lenders who pool their resources to lend to a big borrower. A firm, a single project, or the government can all be borrowers. Each lender in the syndicate provides a portion of the loan amount and shares in the risk of the loan.
The manager is one of the lenders who manages the loan on account of the other lenders within the syndicate. The syndicate might be made up of several distinct types of loans, each with its own set of repayment terms negotiated between the lenders and the borrower.
31. What is capital budgeting? List the techniques of capital budgeting.
The process through which a company evaluates possible big projects or investments is known as capital budgeting. Capital budgeting is required before a project is authorized or denied, such as the construction of a new facility or a large investment in an outside business.
A corporation could evaluate a prospective project’s lifetime cash inflows and outflows as part of capital planning to see if the anticipated returns generated match an acceptable goal benchmark. Investment assessment is another name for capital budgeting. The following are the capital budgeting methods used in the industry
- Payback period method
- Accounting rate of return method
- Discounted cash flow method
- Net present Value (NPV) Method
- Internal Rate of Return (IRR)
- Profitability Index (PI)
32. What is a payback period?
The time it takes to recoup the cost of an investment is referred to as the payback period. Simply explained, it is the time it takes for an investment to break even. People and businesses spend their money primarily to be paid back, which is why the payback time is so critical.
In other words, the faster an investment pays off, the more appealing it gets. Calculating the payback period is simple and may be accomplished simply dividing the initial investment by the average cash flows.
33. What is a balance sheet?
A balance sheet is a financial statement that shows the assets, liabilities, and shareholder equity of a corporation at a certain point in time. Balance sheets serve as the foundation for calculating investor returns and assessing a company’s financial structure.
In a nutshell, a balance sheet is a financial statement that shows what a firm owns and owes, as well as how much money shareholders have invested. To conduct basic analysis or calculate financial ratios, balance sheets can be combined with other essential financial accounts.
34. What is a bond? What are the types of bonds?
When governments and enterprises need to raise funds, they issue bonds. You’re giving the issuer a loan when you buy a bond, and they pledge to pay you back the face value of the loan on a particular date, as well as periodic interest payments, generally twice a year.Interest rates and bond rates are inversely related: as rates rise, bond prices fall, and vice versa.
Bonds have maturity period after which the principal must be paid in full or the bond will default. Treasury, savings, agency, municipal, and corporate bonds are the five basic types of bonds. Each bond has its unique set of sellers, purposes, buyers, and risk-to-reward ratios.
35. Can you explain the difference between equity and debt financing?
Equity financing involves raising funds by selling ownership in the company, whereas debt financing involves borrowing money that must be repaid with interest. Equity financing is typically riskier for investors but offers potential for higher returns, while debt financing is generally less risky but carries the obligation of repayment.
36. How would you calculate the weighted average cost of capital (WACC)?
The WACC is calculated by weighting the cost of each capital component (debt and equity) by its proportional value in the company’s capital structure.
The formula for WACC is: WACC = (E/V x Re) + (D/V x Rd x (1 – Tc))
where,
E = market value of equity
V = total market value of equity and debt
Re = cost of equity
D = market value of debt
Rd = cost of debt
Tc = corporate tax rate.
37. What is your experience with financial modeling?
Financial modeling involves building a mathematical representation of a company’s financial performance, typically for forecasting or valuation purposes. In my previous roles, I have built complex financial models using Excel and other tools to analyze financial statements, forecast cash flows, and evaluate investment opportunities.
38. Can you explain the concept of net present value (NPV)?
NPV is a method of valuing an investment by calculating the present value of its expected cash flows, discounted at the required rate of return. A positive NPV indicates that an investment is expected to generate returns greater than the required rate of return, while a negative NPV suggests it may not be worthwhile.
39. How would you analyze a company’s financial statements?
Analyzing financial statements involves reviewing a company’s income statement, balance sheet, and cash flow statement to evaluate its financial performance and identify trends or areas for improvement. Some key ratios to consider include the debt-to-equity ratio, return on equity, and current ratio.
40. Can you explain the difference between a forward contract and a futures contract?
Both forward and futures contracts are agreements to buy or sell a specific asset at a predetermined price at a future date. However, futures contracts are standardized and traded on organized exchanges, while forward contracts are customized and traded over the counter. Futures contracts are also marked-to-market daily, meaning the parties must settle any gains or losses each day, while forward contracts settle at the end of the contract term.
41. How do you calculate the price-to-earnings (P/E) ratio?
The P/E ratio is calculated by dividing the current stock price by the company’s earnings per share (EPS) over the past 12 months. It is a measure of a stock’s valuation relative to its earnings, with a higher P/E ratio indicating that investors are willing to pay more for each dollar of earnings.
42. Can you explain the concept of cost of capital?
Cost of capital is the required rate of return that a company must earn in order to attract investors and maintain its capital structure. It includes both the cost of debt (interest rate) and the cost of equity (required rate of return), weighted by the relative proportion of each in the company’s capital structure.
43. What are debentures?
A debenture is an unsecured bond or other financial instrument with no collateral. Because debentures lack security, they must rely on the issuer’s trustworthiness and reputation for support. Debentures are regularly issued by enterprises and governments to raise cash or funds.
Conclusion
These concepts form the foundation of finance and are essential for understanding various aspects of financial management and investment decisions. Whether you’re a beginner or an experienced investor, having a grasp of these fundamental principles can help you navigate the complexities of the financial world more effectively. To deepen your knowledge, explore free online courses that can enhance your understanding and skills in finance.
FAQ’s
How to Prepare for a Finance Interview Question?
Six expert tips for your next finance interview
- Be Clear: Keep your answers straightforward and to the point.
- Know Your Stuff: Understand financial topics well.
- Offer More: Show how you can bring extra value to the role.
- Talk the Talk: Speak confidently about the finance world.
- Connect: Engage with your interviewer.
- Keep Growing: Show you’re eager to learn more.
How to answer “Why” finance interview questions?
- Provide Genuine Answers: Be sincere about your enthusiasm for finance, showcasing your reliability and integrity.
- Highlight Your Passion: Express your genuine interest in the field, emphasizing your dedication to making sound decisions.
What is finance in simple words?
Finance involves managing money, encompassing activities like investing, borrowing, budgeting, and predicting financial outcomes.
How to answer the question “Why do we hire you”?
- Emphasize Relevance: Focus on your skills, experience, and accomplishments pertinent to the role.
- Express Eagerness to Contribute: Convey your enthusiasm for the job and your desire to support the company’s success.
Why pursue a career in finance?
- Lucrative Opportunities: Finance careers often offer competitive salaries, job stability, and potential for advancement.
- Flexible Work Options: Many roles in finance allow for remote or hybrid work arrangements.
What are types of finance?
There’s personal finance (like managing your own money), corporate finance (for businesses), and public finance (for governments).
What are the 4 areas of finance?
Finance is the management of money which includes investing, borrowing, lending, budgeting, saving and forecasting. There are four main areas of finance: banks, institutions, public accounting and corporate.
