Top 35+

Finance Interview Questions

2024

By Great Learning

Compiled by Dr. Hari Krishna Karri

Introduction

Finance is a critical component of any business organization, and

interviews for finance positions can be extremely challenging. The finance
interview process is designed to test a candidate’s knowledge of financial
concepts and their ability to apply those concepts in a real-world setting.
Candidates who are well-prepared for finance interview questions will be
able to demonstrate their understanding of financial concepts and show
how they would apply those concepts in a given situation. They will also
be able to effectively communicate their ideas and explain their thought
process.

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.

Compiled by Dr. Hari Krishna Karri

How to prepare for Finance interview questions?

To prepare for an actual interview, you’ll need to do a lot more than look
for a list of frequent interview questions on the internet. You must have a
solid awareness of your target company and its product, as well as the
ability to show that you are the ideal applicant for the position. The
interview consists of three parts: pre-interview, interview, and post-
interview. Let’s see the few techniques that are essential to know about
preparing for the interview.

People who share similar values even in a company’s culture are sought
after by employers. Prior to an interview, do some research about the firm
to gain insight into its long-term goals? Discussing these issues with your
prospective employer can also help you look to be a long-term investment.
Conducting comprehensive research on the firm may also help you align
your CV with its criteria.

Maintain your LinkedIn profile up to date at all times. Your LinkedIn page
may be checked by the interviewer to gain a sense of your history and
personality.

Read the description thoroughly to understand the work skill sets and the
sort of applicant the company is looking for. The job description could also
reveal what kinds of questions the interviewer might ask. Make a list of
the skills, expertise, and professional and personal characteristics that the
company is looking for to show that you’re the best candidate for the job.

Always have a few questions prepared for the interviewer. This can help
you avoid an uncomfortable pause when asked if you have any questions.
It’s advisable to keep queries about work or business culture to a
minimum.
Compiled by Dr. Hari Krishna Karri
Professionals who share the same beliefs as the company’s culture are
sought after by employers. Prior to an interview, do some research about
the firm to gain insight into its long-term goals? Discussing these issues
with your prospective employer can also help you look to be a long-term
investment. Conducting comprehensive research on the firm may also
help you align your CV with its criteria.

Arrive at the location a few minutes early. You will be able to relax and
unwind as a result of it. However, you need not arrive too early. Use that
time to plan interview questions instead.

During a job interview, listening is just as important as responding to

questions. If you’re not paying attention, they won’t be able to respond
effectively.

Prepare to engage in conversation with the interviewer. Instead of offering

robotic responses to questions, build a relationship with the interviewer
throughout the interview.

Answer all questions briefly and clearly, emphasizing your most significant
achievements. It’s perfectly OK to pause before answering a tough
question to gather your thoughts or to seek clarification if you’re unsure
what the question means.

Good examples show off your strengths and help an interviewer envision
what you may accomplish at their company. Examples are methods to
show the recruiter that you have the skills and experience to succeed in
the position for which you are applying.

Compiled by Dr. Hari Krishna Karri

Spend a few minutes after the interview thinking about how you performed
and where you might have done better. A thorough examination can aid in
the development of your interviewing abilities in preparation for future
interviews. Asking the interviewer for comments on the interview is not a
good idea.

If you have not heard from the company within the time range specified,
you should approach the Human resources department to enquire about
the outcome of the interview. Regardless of how you contact HR, make
sure to also include your name, the post you applied for, the day of the
interview, the name of the interviewer, and any other pertinent
information to assist HR professionals to recall your meeting and update
you on the progress of your interview in real-time.

Compiled by Dr. Hari Krishna Karri

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.

Compiled by Dr. Hari Krishna Karri

What is a cash flow statement? Explain.

A cash flow statement is a crucial instrument for managing finances and

tracking an organization’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.

Compiled by Dr. Hari Krishna Karri

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.

Compiled by Dr. Hari Krishna Karri

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

Compiled by Dr. Hari Krishna Karri

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, labor, and overhead. This is required in order to
appropriately determine the cost of items and services.

Compiled by Dr. Hari Krishna Karri

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.

Compiled by Dr. Hari Krishna Karri

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.

Compiled by Dr. Hari Krishna Karri

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 specializes 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.

Compiled by Dr. Hari Krishna Karri

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.

Compiled by Dr. Hari Krishna Karri

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.’

Compiled by Dr. Hari Krishna Karri

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 utilize 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 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.

Compiled by Dr. Hari Krishna Karri

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.

The plan of action is the most important aspect of any financial risk
management strategy. These are the methods, rules, and practices 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.

Compiled by Dr. Hari Krishna Karri

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.

Compiled by Dr. Hari Krishna Karri

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.

Compiled by Dr. Hari Krishna Karri

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.

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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)

Compiled by Dr. Hari Krishna Karri

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.

Compiled by Dr. Hari Krishna Karri

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.

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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.

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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.

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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.

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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.

Compiled by Dr. Hari Krishna Karri