Top 35+ finance interview questions

Introduction

Finance plays a critical role in any business, making finance interviews particularly challenging. These interviews assess candidates’ knowledge of financial concepts and their ability to apply these concepts in real-world scenarios. Thorough preparation enables candidates to demonstrate their understanding of financial concepts and showcase their ability to effectively communicate and explain their thought processes.

If you’re looking for questions that will be asked during a finance interview, you’ve come to the right place. In this blog post, we’ll share some of the most common finance interview questions and provide tips on how to answer them. Whether you’re interviewing for a position in financial analysis, investment banking, or another finance-related field, you can expect to field questions about your technical skills and knowledge. But in addition to these technical questions, you’ll also likely be asked behavioral questions about your work style and experience. To help you prepare for your finance interview, we’ve compiled a list of some common finance interview questions, along with tips on how to answer them.

What to Expect in a Finance Interview?

When attending a finance interview, candidates can expect to encounter two main types of questions:

• Technical Questions: These will test your knowledge and skills in areas like financial analysis and investment banking.
• Behavioral Questions: These will explore your work style and experience.

How to Prepare for Finance Interviews

Preparation is key to success in finance interviews. Here’s how you can prepare effectively:

1. Research the Company:
   • Understand the company’s long-term goals to align your responses.
   • Keep your LinkedIn profile updated as interviewers may review it to gauge your background.
   • Study the job description thoroughly to anticipate possible questions and tailor your responses accordingly.
2. Prepare Smart Questions:
   • Have a list of insightful questions ready to avoid awkward silences when asked if you have any questions.
3. Day of the Interview:
   • Arrive a few minutes early to settle and focus before the interview.
   • Active listening and engagement are crucial for a successful interaction.
   • Respond briefly and clearly, emphasizing your significant achievements.
4. Post-Interview Strategy:
   • Reflect on your performance to identify areas for improvement.
   • Follow up with HR if you do not hear back within the specified timeframe.

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 and Answers

What is Finance? 

Finance is a wide phrase that encompasses banking, debt, credit, capital markets, money, and investments, among other things. Finance, in its most basic form, refers to money management and the act of obtaining necessary finances. Money, banking, credit, investments, assets, and liabilities are all part of financial systems, and finance is responsible for overseeing, creating, and studying them. There are essentially three types of finance, personal finance, corporate finance, and governing body finance.

What do you understand by working capital?

Working capital, also referred to as net working capital (NWC), is the difference between a company’s current assets and current liabilities, such as cash, accounts receivable/unpaid invoices from customers, and raw materials and completed goods inventories. The assets and liabilities on a company’s balance sheet are used to calculate working capital. Cash, receivable accounts, inventories, and other assets that are anticipated to be liquidated or converted into cash in less than a year are described as current assets. Accounts payable, salaries, income taxes, and the current component of long-term debt due within a year are all examples of current obligations.

What is a cash flow statement? Explain. 

A cash flow statement is a crucial instrument for managing finances and tracking an organisation’s cash flow. This statement is one of three important reports used to assess a company’s performance. It is commonly used to make cash forecasts in order to facilitate short-term planning. The cash flow statement displays the source of funds and aids in the tracking of incoming and departing funds. Operating operations, investment activities, and financial activities all contribute to a company’s cash flow. The statement also shows cash inflows, business-related costs, and investment at a certain moment in time. The cash flow statement provides useful information for managers to make educated decisions about how to regulate corporate operations.

Can a company show positive net income and yet go bankrupt? 

Yes, it is possible for a corporation to have a positive cash flow and still go bankrupt.The first type of bankruptcy is insolvency, which occurs when your spending cash surpasses your incoming cash. This frequently occurs when a company overextends itself to complete a project, only to find that the client does not pay as promptly as planned.The second sort of bankruptcy is “true” bankruptcy, which occurs when a company’s obligations outnumber its assets. Even if a corporation has good cash flow, it may not be able to continue as a “ongoing business” without the assistance of investors or the bankruptcy court under this form of bankruptcy.By decreasing working capital (by increasing accounts receivable and decreasing accounts payable) and financial strategies, a corporation might display positive net income despite nearing insolvency.

What is hedging? Explain. 

Hedging is a risk management approach that involves acquiring an opposing position in a comparable asset to balance investment losses.Hedging often results in a loss in prospective earnings due to the reduction in risk it provides.Hedging necessitates the payment of a premium in exchange for the protection it offers.Derivatives, such as Futures and option contracts, are commonly used in hedging tactics.When you get insurance, for example, you are hedging yourself against unanticipated calamities.Hedging is a valuable concept that every investor ought to be aware of when it comes to investing. Hedging  means to acquire portfolio protection in the stock market, which is frequently equally as essential as portfolio appreciation.Hedging is frequently addressed in a more general sense than it is described. Even if you’re a novice investor, understanding what hedging is and how it works might be advantageous.

What is preference capital?

The part of capital raised via the issuance of preference shares is known as preference capital. This is a hybrid kind of finance that has some properties of equity and other characteristics of debentures. Preference shares, also known as preferred stock, are stocks of a corporation’s stock that pay dividends to stockholders before common stock payments are paid out. Preferred investors have a right to be compensated from the firm’s assets before ordinary shareholders if the company goes bankrupt.

What do you understand by fair value?

The current price or worth of an object is known as fair value. More specifically, it is the amount for which the object might be sold that is both fair to the buyer and to the seller. Fair value does not refer to items being sold in dissolution; rather, it relates to items being sold in regular, fair circumstances. When assets are sold or a firm is bought, fair value becomes increasingly crucial. Using fair value, a fair and reasonable sales price for specific things or an entire firm may be calculated. When a firm is acquired, the fair value is used to assess the asset worth and arrive at a suitable sales price.

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

What is the secondary market? 

In the primary market, securities issued by a corporation for the first time are sold to the public. The stock is traded in the secondary market once the IPO is completed and the stock is listed. The key distinction between the two is that even in the primary market, investors buy securities directly from the firm through initial public offerings (IPOs), but in the secondary market, buyers buy securities from other investors who are eager to sell them.

Some of the primary instruments accessible in a secondary market include equity shares, bonds, preference shares, treasury bills, debentures, and so on.

What is cost accountancy? What are its objectives?

Cost accounting is a type of managerial accounting that tries to capture a company’s entire cost of production by measuring both variable and fixed expenses, such as a leasing fee.The goal of cost accounting is to develop the procedures for recording, classifying, and allocating expenditures on commodities, labour, and overhead. This is required in order to appropriately determine the cost of items and services.

What is a put option?

A put option is a contract that gives the option buyer the right, but not the responsibility, to sell or short a set quantity of an underlying securities at a predetermined price within a predetermined time frame. The striking price is the predetermined price at which the buyer of a put option can sell the underlying securities.Shares, commodities, bonds, commodities, forex, futures, and indices are all traded as underlying assets for put options. A call option, on the other hand, grants the holder the right to buy the underlying securities at a stated price, either on or before the option contract’s expiration date.

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.

What is Deferred Tax Liability? 

A deferred tax liability is a line item on a company’s balance statement that represents taxes that are due but not payable until later.Scheduled to a difference in time between when the tax was accrued and when it is due to be paid, the liability is delayed.

What is goodwill?

Goodwill is an intangible asset connected with the acquisition of a business by another. Goodwill is defined as the fraction of the purchase price that is more than the total of the net fair value of all assets acquired and liabilities taken in the transaction. Goodwill exists for a variety of reasons, including the value of a company’s brand name, a strong client base, good customer relations, good staff relations, and proprietary technologies.

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

What is investment banking? 

Investment banking is a branch of banking that specialises in assisting individuals and businesses in raising funds and providing financial advice.They function as a link between security issuers and investors, as well as assisting new businesses in becoming public. They either acquire all available shares at a price determined by their experts and resell them to the general public, or they sell shares on behalf of the issuer and receive a commission on each share sold.

What are derivatives? 

Derivatives are sophisticated financial contracts that are based on the value of an underlying asset, a collection of assets, or a benchmark. Stocks, bonds, commodities, currencies, interest rates, market indexes, and even cryptocurrencies are examples of underlying assets. Investors enter into derivative contracts that spell out how they and another party will react to future changes in the underlying asset’s value.Derivatives can be bought and sold over-the-counter (OTC), which means through a broker-dealer network, or on exchanges.

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.

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.

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.’

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.

What are swaps?

Both investors and traders utilise derivatives contracts as one of the greatest diversification and trading instruments. It may be separated into two types according on its structure: contingent claims, often known as options, and forward asserts, such as exchange-traded futures, swaps, or forward contracts. Swap derivatives are efficiently utilised 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.

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 organisations 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.

The plan of action is the most important aspect of any financial risk management strategy. These are the methods, rules, and practises that your company will follow to guarantee that it does not take on even more danger than it can handle. To put it another way, the strategy will make it plain to employees.

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.

Explain 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. However, depending on a company’s accounting strategy, certain marketable securities may be classified as cash equivalents.

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.

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.

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.

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

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.

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 authorised 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)

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.

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.

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.

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.

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.

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.

Can you explain the concept of net present value (NPV)?

NPV is a measure of the value of an investment by calculating the present value of its expected cash flows, discounted by the required rate of return. If the NPV is positive, it indicates that the investment is expected to generate a return greater than the required rate of return, while a negative NPV suggests the investment is not worthwhile.

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.

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.

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 the 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.

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.

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

The above finance interview questions are designed to give you a better understanding of the finance industry and what to expect during your interview. Financial interview questions are designed to assess a candidate’s knowledge, skills, and experience in various areas of finance. Preparing for these questions can help you demonstrate your expertise and stand out as a strong candidate. Whether you are applying for a job in investment banking, corporate finance, or any other field, being well-versed in financial interview questions can give you a competitive edge. By showcasing your ability to analyze financial statements, build financial models, and evaluate investment opportunities, you can demonstrate your value to potential employers and pave the way to a successful career in finance.