1. Tell me what is the interest coverage ratio?
This is commonly considered EBIT divided by interest expense. This is also referred to as “times interest earned”.
2. Explain what is the 'Overnight Rate'?
The interest rate at which a depository institution lends funds to another depository institution (short-term), or the interest rate the central bank charges a financial institution to borrow money overnight. The overnight rate is the lowest available interest rate, and as such, it is only available to the most creditworthy institutions.
3. Tell me what is the current LIBOR rate?
Quote the current LIBOR rate.
4. Explain me what is a 'Debt Instrument'?
A debt instrument is a paper or electronic obligation that enables the issuing party to raise funds by promising to repay a lender in accordance with terms of a contract. Types of debt instruments include notes, bonds, debentures, certificates, mortgages, leases or other agreements between a lender and a borrower. These instruments provide a way for market participants to easily transfer the ownership of debt obligations from one party to another.
5. Explain me what type of person makes a good credit analyst?
Someone who's detail oriented, good with numbers, enjoys research and analysis, likes working independently and is good at financial modeling and financial analysis with strong Excel skills.
6. Please explain what is a 'Preferred Stock'?
A preferred stock is a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and the shares usually do not carry voting rights.
Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in that it has the potential to appreciate in price. The details of each preferred stock depend on the issue.
7. Explain me what is 'Inflation'?
Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly.
8. Explain me what you know about this division?
Your interviewers will want to know that you're familiar with their firm, bank or hedge fund. McKelvie says that if you're using a recruiter, use him for all he's worth. He'll most likely help you to understand the company culture, as well as the products traded, portfolio managed, or loan vehicles offered. But do your own homework, too.
9. Do you know about National Bureau of Economic Research - NBER?
This private, non-profit, non-partisan research organization's main aim is to promote greater understanding of how the economy works. It disseminates economic research among public policymakers, business professionals and the academic community.
10. Do you know what is 'Over-The-Counter - OTC'?
Over-the-counter (OTC) is a security traded in some context other than on a formal exchange such as the New York Stock Exchange (NYSE), Toronto Stock Exchange or the NYSE MKT, formerly known as the American Stock Exchange (AMEX). The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments, such as derivatives, which are traded through a dealer network.
11. Tell me what do you use for the discount rate in a DCF valuation?
If you are forecasting free cash flows to the firm, you normally use the Weighted Average Cost of Capital (WACC) as the discount rate. If you are forecasting free cash flows to equity, you use the cost of equity.
12. Explain me what is a reasonable Debt/Capital ratio?
It completely depends on the industry. Some industries can sustain very low debt to capital ratios, typically cyclical industries like commodities, or early stage companies like startups. So these would have 0-20% debt to capital. Other industries like banking and insurance can have up to 90% debt to capital ratios.
13. Please explain what is a 'Stock'?
A stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.
There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders' meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.
14. Tell me how do you calculate the terminal value in a DCF valuation?
Terminal value is either use an exit multiple or the Gordon Growth (growing perpetuity) method.
15. Tell me what do the credit rating agencies do?
Rating agencies are supposed to help provide trust and confidence in financial markets by rating borrowers on their creditworthiness of outstanding debt obligations. They can, however, run into conflicts of interest and cannot be blindly relied on for assessing a borrower's risk profile.
16. Tell me what is a 'Commodity'?
A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type; commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.
17. Explain me what characteristics are most important to be successful as a credit analyst?
It may sound obvious, but it must be stressed: analytical thinking is vital to one's success as a credit analyst. Professionals in this field do a lot of evaluating; they study customer records, meet clients in person, and become familiar with their history and habits. Analysts must be able to put all these together and decide if it is productive for the company to extend credit in this case.
18. Tell me what is the 'Business Cycle'?
The business cycle is the fluctuation in economic activity that an economy experiences over a period of time. A business cycle is basically defined in terms of periods of expansion or recession. During expansions, the economy is growing in real terms (i.e. excluding inflation), as evidenced by increases in indicators like employment, industrial production, sales and personal incomes. During recessions, the economy is contracting, as measured by decreases in the above indicators. Expansion is measured from the trough (or bottom) of the previous business cycle to the peak of the current cycle, while recession is measured from the peak to the trough. In the United States, the National Bureau of Economic Research (NBER) determines the official dates for business cycles.
19. Explain what is 'Capital Expenditure (CAPEX)'?
Capital expenditure, or CapEx, are funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. It is often used to undertake new projects or investments by the firm. This type of outlay is also made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building, to purchasing a piece of equipment, or building a brand new factory.
20. Explain me what is a 'Recession'?
A recession is a significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP), although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession.
21. Explain me what Is a Credit Default Swap?
This question is more likely to be thrown at someone with previous experience in the field who is applying for a senior credit risk analyst position, but it still might show up in an interview for an entry-level credit risk analyst position with a bank. A good answer demonstrates you understand the concept, and a better answer likely includes an example. A credit default swap (CDS) is a frequently used method of mitigating risk in fixed-income, debt security instruments such as bonds, and it is one of the most common financial derivatives. A CDS is essentially a type of investment insurance that allows the buyer to mitigate his investment risk by shifting risk to the seller of a CDS in exchange for a fee. The seller of the CDS stands in the position of guaranteeing the debt security in which the buyer has invested.
Other questions likely to be encountered in a credit risk analyst position interview are general questions about your problem-solving abilities, your ability to work as a part of a team and your understanding of basic macroeconomics concepts such as fiscal policies and the prime rate.
22. Explain me what is a 'Bond'?
A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer.
23. Tell me how would you decide if you can lend $100 million to a company?
Review all three financial statements for the past five years and perform a financial analysis. Determine what assets can be used as collateral, how much cash flow there is, and what the trends of the business are. Then look at metrics like debt to capital, debt to EBITDA, and interest coverage. If all of these metrics are within the bank's parameters it may be possible to lend the money, but will still depend on qualitative factors as well.
24. Explain me are You Proficient in Financial Analysis?
In order to be a successful credit analyst, it is important that you are proficient in financial analysis, as well. Your interviewer may ask you if you understand things such as cash-flow and other financial statements, income growth, market shares and much more. You may also be asked if you can correctly calculate debt to income ratios in order to discover a client's dispensable income. All of this information is necessary for developing a client's credit portfolio. You can answer with “I am very familiar with using various tools and methods to perform financial analyses. I am capable of determining a client's credit situation quickly and accurately.”
The Current Ratio, ROE, ROA, Debt/Capital, Debt/Equity, and Interest Coverage Ratio.
26. Tell me what's your experience in managing a team or leading junior employees?
Credit analysts work hand-in-hand with traders, bank management, risk specialists and/or IT people. So, it's a given that you'll need to be a people person, a team player, and a go-getter. For instance, you'll need to demonstrate how you can effectively deal with the inherent challenges of a trading environment. If you have specific examples of management experience, this is the time to emphasize them.
27. Role-specific Credit (Risk) Analyst Interview Questions:
☛ What's your quantitative analysis experience?
☛ What financial software have you used in the past?
☛ Which financial ratios do you use more often? Which is the most important and why?
☛ What types of customers have you dealt with in the past?
☛ Can you explain the meaning of Credit Default Swap (CDS)?
☛ What's different with Basel III?
☛ Do you like working in a team?
28. Operational and Situational Credit (Risk) Analyst Interview Questions:
☛ How does a balance sheet or cash flow statement help you in determining credit risk?
☛ Walk me through the process of determining whether we should loan $5 million to a company
☛ If an important long-time customer applied for a loan, but after your analysis you found the risk was too high, how would you handle it?
☛ Imagine one of the company's salespeople strongly wants to acquire a particular customer, but you've found their creditworthiness is lacking. How do you resolve this?
29. Behavioral Credit (Risk) Analyst Job Interview Questions:
☛ Tell me about a time your judgement on a case was proven incorrect. What should you have done differently?
☛ Recall a time you used your communication skills to resolve an issue at work
☛ Tell me about a time you developed an effective method or model to assess profitability
30. Credit control Job Interview Questions:
☛ What experience do you have in a credit control role?
☛ How would you deal with a client who was refusing to pay?
☛ What are your interpersonal skills like?
☛ How would you address a difficult subject with a customer?
☛ How effective are you in negotiation situations?
☛ How would you handle a customer forcefully disagreeing with your decision?
☛ How would you feel about rejecting or sanctioning desperate customers?
☛ Are you a good team player?
☛ Do you have any credit management qualifications?
☛ Would you be willing to work overtime during busy periods?
31. Explain me are you proficient with relevant financially-oriented software and technology?
Professionals are typically required to use specialized software to perform things like generating financial ratios and developing statistical models to assess and predict information. Mentioning your ability to use computers in general for related activities such as market research is also relevant.
32. Explain me do You Have Technical Expertise? How about Programming Experience?
The more technical expertise and programming experience you have, the better off you will be. You should first prove to your interviewer that you have a strong understanding of PFE, CVaR and VAR analysis tools. These are the ones that are most commonly used, so a strong understanding of all of them is critical. Similarly, if you have programming experience, you are much more likely to be hired. Tell your interviewer if you are proficient with C++, MATLAB, SAS, SQL, VB/VBA and Moody's KMV. The more of these you understand, the better off you will be and the more likely that your interviewer will be impressed with your abilities.
This is a good time to highlight specific accounting, corporate finance, and financial research expertise. If you've worked with the products the firm has traded, make sure to work it into the conversation a number of times. Basel II implementation experience is also a selling point. Problem solving skills are a major requirement for the job, so be prepared to discuss them.
34. Explain me what are your areas of technical expertise? Do you have any programming experience?
As a credit analyst, you will be better off if you have expertise and experience with computer software and programming. You first want to cover you deep knowledge of PFE, CVaR and VAR analysis tools. These are the most widely used software. Additionally, mention any proficiency with MATLAB, C++, SQL, VB/VBA, SAS and Moody's KMV. If you are familiar with any other programs or languages, share this with your interviewer so he or she can get a better idea of what you could do for the company.
This can be a key issue, since maintaining good client relationships with important corporate clients is essential to a bank's success. A bank does not want to risk losing a multimillion dollar client over one loan application, but neither does it wish to make loans it does not believe can reasonably be paid back. How you answer this type of question will display your ability to handle customer relations well and offer creative solutions for clients, while not endangering the bank's position as a lender. Therefore, a good answer might be something like, "I would offer a smaller loan amount I believe the bank could safely extend, and then let the client know the exact steps it could take to allow me to extend it further credit, and offer to meet with it to review the situation at some appropriate point in the future to consider a larger loan."
