When you get to the interview stage for an investment banking role, nobody expects you be a technical whizz - that comes after you've got the job, where your first few months of intense learning may make you feel like you're back at university. That said, you do need to have a certain level of technical knowledge. After all, if you've got no understanding of how banking and the economy at large works then how can you know that it's the right career for you?
Expect to be grilled on the markets (be able to talk about a company which you think is a good investment), business basics (you should know about the techniques bankers use to value a company, for instance), banking fundamentals (the typical issues that come up on an M&A deal), and macroeconomic theory - which is what we're going to tackle here.
It's impossible to separate banking from economics. The slightest change in the government's economic policy or the nation's economic position can have a big impact on investors' behaviour and thus, the fortunes and operations of investment banks. Given that one of the main functions of an investment bank is to advise its clients on the wisest way to invest their money, it's imperative that bankers know the economic landscape inside out.
So where to get the basic knowledge you'll need to sail through the interview stage? If you've studied economics A-level, a lot of it may be familiar to you already. If not, then it's important to do some research. For the latest financial news, keep abreast via the Economist and the Financial Times. The Gateway tackles the same topics as the mainstream press, but in a more instructive, accessible manner.
But keeping up with the news will only get you so far. It's essential that you're able to explain the theory behind events. So if a merger is postponed due to market conditions, you should be able to explain why. Most people have some knowledge of the ongoing Greek debt crisis, but how many people know why it's happened? In order to get this kind of basic theory it may be worth reading a couple of introductory books. We heartily recommend All You Need To Know About the City by Christopher Stokes as a starting point.
Once you've got the basic theory down, then you should be able to read the financial press in a different way. Probe behind the story: look at the current economic climate and ask why an event is happening and think about the economic theory behind it. Doing so will put you in the analytical, evaluative frame of mind required to be a banker and should stand you in excellent stead come your interview.
What are interviewers looking for?
1. Commercial awareness
Technical questions are designed to gauge how aware you are of the business world. You need to demonstrate a knowledge of how it works and what impact change has upon it.
2. Analytical thinking
It's not enough to have a head full of knowledge - you need to be able to apply it correctly. Technical questions challenge your applied thinking - a huge part of banking.
3. Logical thought processes
While you need a basic level of understanding in order to answer technical questions, many of them can be answered using logic. For our worked example, for instance, anyone who understands what interest rates are should be able to logically deduce how they impact other areas of finance. Remember that banks are as interested in how you think as what you know.
4. Numeracy skills
Technical questions will test your competency with numbers. You don't need to be a mathematics graduate, but your mental arithmetic should be top-class.
5. Interest in and a basic understanding of banking
How does trading work? Which shares do you think are attractive investments right now? In particular, make sure you're able to talk about the area for which you're interviewing.
What is the effect of rising interest rates on the following:
Corporate valuations? Bond prices? Exchange rates? Inflation? Economic growth?
In order to grasp the importance of interest rates to our economy, you need to understand monetary policy: the actions a central bank (in the case of the UK, the Bank of England) takes to manipulate the amount of money circulating in an economy. As you prepare for investment banking interviews, you should try to learn about this topic. Then the trick to answering this question correctly is applying your knowledge effectively.
Consider the economy as a finely-poised house of cards, with interest rates as its volatile foundation. To answer this question, you must demonstrate that you understand each of its components. As an introduction, why not offer a quick definition of interest rates, along with a couple of points on why they're so important on a macroeconomic level? Start by defining what each one is, then explain how it relates to interest rates, before concluding by outlining what effect rising interest rates would have on it. You won't have time to go into massive detail on each topic, so be concise and to the point.
The cost a person or business pays for the use of someone else's money.
Those that save money in a bank earn interest on that money, since they're effectively lending the bank their savings. Those that borrow money from banks pay interest on the amount they borrow.
The Bank of England sets an interest rate at which it lends to financial institutions. This rate will impact on the interest rate banks set for their customers. If it's high, expect the banks' rates to mirror this rate.
High interest rates make it more attractive to save money and less attractive to borrow money, while low interest rates have the opposite effect.
The rate at which the general level of prices for goods and services is rising and, as a result, purchasing power is falling.
Interest rates and inflation are closely related, and the Bank of England often uses interest rates as a means of controlling inflation.
Rising interest rates generally lead to lower inflation as there's a greater incentive to save money (to earn interest) and less incentive to borrow money (because the interest payable will be higher, making borrowing more expensive).
Subsequently, there is less money in circulation, and lower demand for goods. Prices fall in line with a lack of demand, and the inflation rate falls.
Falling interest rates are often accompanied by higher inflation, as the process described above works in reverse.
Tradeable slices of debt issued by corporations or governments.
Bonds are issued for a defined period of time at a particular rate of interest and are sold in order to finance projects and general corporate activities.
Investors often buy bonds in order to earn interest from them. Even though the interest rate payable (the coupon) of a corporate bond generally doesn't change with interest rate fluctuations, demand for bonds may change according to interest rates.
If a bond pays a rate of interest of 5 per cent and the Bank of England changes the interest rate to 6 per cent, investing in that bond will be less attractive and investing in something with a variable rate of interest that's tracking the Bank of England rate will be more attractive.
Therefore, those selling bonds may be forced to sell the bond for a lower price in order to make it an attractive investment when interest rates are rising.
The price of one country's currency expressed in another country's currency and thus the rate at which one currency can be exchanged for another.
The interest rate set by a central bank can make investing in that country's currency (through the purchase of government bonds) more or less attractive.
If the Bank of England sets a high rate of interest in the UK, then it will attract foreign investment because investors will be able to earn a higher rate of interest from purchasing UK government bonds, known as gilts.
The foreign demand for gilts therefore increases, meaning the value of the British pound (the exchange rate relative to other currencies) increases.
The process of determining the economic value of a company, often prior to a sale, M&A deal or flotation.
If interest rates rise, businesses are often affected in the same way as individual customers: they borrow less because borrowing is more expensive, meaning they cut back on spending and investment.
Since investing (in staff, infrastructure, property etc) generally leads to higher revenues, a fall in investment is likely to result in lower revenues (cash flows) in the future. Therefore, the value of companies tends to fall with rising interest rates.
The capacity of an economy to produce goods and services at one period of time compared to another, usually measured using gross domestic product (GDP).
Interest rates are often used by governments to attempt to stimulate economic growth- the Bank of England has kept interest rates at a record low of 0.5 per cent over the past two years for this reason.
Low interest rates encourage businesses to borrow and invest in assets, which should in turn boost employment and the economy.
If interest rates are rising, it may be an indication that the economy is growing strongly, as banks may have increased their lending rates in order to capitalise on high borrowing. But rising interest rates can slow economic growth as they discourage borrowing.