Fixed Income

In order to help you to prepare, we have list down some of the most frequently asked interview questions in Fixed Income.

Q.1 What is  yield to maturity (YTM)?

Yield To Maturity (YTM) is the net profit or return of a bond. It is calculated after adjusting face value and interest payments from the amount on maturity.

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Q.2 What are non-convertible debentures (NCDs)?

They are debt instruments with a fixed tenure issued by companies to raise money for business purposes. Unlike convertible debentures, NCDs are non-convertible into equity shares of the issuing company at a future date.

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Q.3 What is a term bond?

These bonds are the bonds from the same issue sharing the same maturity dates. Term bonds that have a call feature can be redeemed at an earlier date when compared to the other issued bonds. A call feature, or call provision, it's an agreement that bond issuers make with buyers. An "indenture," is the term used for this agreement which is the schedule and the price of redemptions, plus the maturity dates.
Examples to this bond are Corporate and municipal bonds having 10-year call features.

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Q.4 The benefit u/s 80ccf can be availed up to what maximum amount?

Under section 80CCF of the Income Tax Act, 1961, the maximum benefit to an investor shall be Rs. 20,000/-.

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Q.5 What do you understand by the corporate bond?

A corporate bond is a kind of debt security issued by a firm and sold to investors. The company gets the capital it needs and in return, the investor is paid a pre-established number of interest payments at either a fixed or variable interest rate. Generally, a short-term corporate bond has less than five years of maturity, intermediate is five to 12 years and long term is more than 12 years. Because there is a higher risk of a company defaulting than a government, therefore, the Corporate bonds are characterized by higher yields.

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Q.6 How should the interest on infrastructure bonds be treated?

The interest received on these bonds shall be adjusted as an income from any other source and shall form part of the total income of the assessed in that financial year in which they are received.

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Q.7 Under section 80CCF of the Income Tax Act, 1961, the maximum benefit to an investor shall be Rs. 20,000/-, what if i apply for amount more than 20,000/-?

If you apply for amount more than 20,000/- though the allotment shall be made for the sum applied, however the benefit as per tax law may only be availed for a maximum sum of Rs. 20,000/-.

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Q.8 Are these infrastructure bonds tax free?

No, the interest received in these bonds is taxable. Therefore, the investor is liable to pay tax on the received tax.

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Q.9 Where are new bonds issued initially traded?

New bonds that are issued are initially traded in 'New issues' Market.

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Q.10 How NCDs can be purchased?

For a specified period of time public issue of NCDs will be commenced by the companies. After that the NCDs are listed on the stock exchange. Investors who are interested in investing in the NCDs can purchase the NCDs from the open market through registered brokers.

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Q.11 Who can offer Long Term Infrastructure Bonds?

Usually entities such as LIC, IDFC, IFCI and other NBFCs that are classified as Infrastructure Finance Companies by RBI are allowed to issue these long term infrastructure bonds.

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Q.12 Can I still apply for subscription of bonds, if i don't have a Pan card?

As per the Laws it's mandatory to have a PAN card for subscribing to these bonds.

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Q.13 What are the different type of Fixed Income/Bond Assets Classes?

Different type of Fixed Income/Bond Assets Classes are - 1. Governments 2. Sovereigns 3. Agency bonds 4. Supranational 5. Corporates

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Q.14 If the same tax benefit is being offered then is there any benefit of investing in tax saving infrastructure bonds?

Under Section 80 CCF of the Income-Tax Act, Investment up to Rs 20,000 in these bonds is eligible for income tax deduction. This is over and above the Rs 1,00,000 deduction available under Section 80C.
These are long-term secured bonds which maturity in 10-15 years

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Q.15 Who is responsible to organise the New Issue?

A Lead Manager bank is responsible to organise the New Issue and other Investment banks into the Syndicate, such that all banks will earn the fees for taking on the risk.

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Q.16 Can NRIs made investment in the ncds?

Yes, NRIs can make the investment in the NCDs provided the company issuing NCDs allows them to invest in it.

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Q.17 What do you understand by 'Straights'?

Bonds and Fixed income mean the same thing. Most bonds are 'Straight' having a fixed interest payment every year called a coupon and a repayment date called a Maturity Date. Bonds that are not straight include Floating Rate Notes with interest payment that changes periodically often linked to an index.

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Q.18 Can a Fd be redeemed before the original term?

Yes, before the original term of the FD, it can be closed. Interest will be paid at the rate applicable on the date of deposit, in the event of the Fixed Deposit being closed before completing the original term of the deposit, for the period for which the deposit has remained with the Bank only. In case of premature withdrawal the deposit may be subject to penal rate of interest as prescribed by the Bank on the date of deposit.

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Q.19 Will there be any Tds deduction on these bonds?

No. As these bonds are issued Compulsorily in demat mode and shall be listed on NSE & BSE, thus no TDS shall be deducted on the interest received.

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Q.20 How will I receive my interest on the due date?

Through ECS the interest shall be credited to the respective Bank account registered with the demat account on the due date for interest payment, and -if the due date is a gazetted holiday then the next working date.

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Q.21 Which is typically higher the cost of debt or the cost of equity?

As per the analysis the cost of equity is always higher than the cost of debt because the cost associated with borrowing debt is tax deductible. Moreover, the cost of equity is higher because equity investors are not guaranteed to get fixed payments, unlike lenders.
Debt is less expensive when compared to the cost of equity because its Interest payment is considered an expense. In a firm’s capital structure debt is also given preference. So, in the situation of liquidation or Bankruptcy, before the equity holders the debt holders get paid their fund first.

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Q.22 Are you interested in Investment Banking?

This question usually is asked to check your interest to know your understanding of the Investment Banking. Therefore, you should be aware of the certain key skills and attributes required for this job. You should also explain why you think you are a suitable candidate for this position.

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Q.23 As an Investment Banker what are your long-term career goals?

It's asked to know whether you are serious about your career and ready to work in this filed. It is a financial job, so becomes crucial for the Bank to hire a candidate who is ready to work with the same Bank for a longer time.

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Q.24 What is a deferred tax asset?

A deferred tax asset is created when any business pays more tax to the IRS than that is reported on their income statement. It is created from the net operating losses and differences in revenue recognition.

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Q.25 What do you understand by a fairness opinion?

It is an independent assessment. Issued by an Investment Bank. Mainly price offered in a merger or acquisition are included in this. A fixed fee is provided by it, which typically by an institution which is not involved in the transaction.

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Q.26 What is Beta?

Beta is a measure of the riskiness of specific stock. It is calculated as the covariance between stock’s return and the total equity market return divided by the change of the return given by market. By default, beta is 1.0.
Stock with beta > 1 is considered riskier when compared to a market.
While, a stock with beta < 1 is considered less risky.

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Q.27 Explain risk and return.

The risk-return tradeoff asserts that the potential return increases with an enhance in risk. According to the risk-return tradeoff, spent money can provide higher profits only if the investor will receive a greater chance of losses.

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Q.28 Explain acceleration.

Acceleration clause provides for the creditor to seize the borrower to repay promptly. Normally, it will be drafted into the bond indenture that a tenants with a set percentage of total principal is required to force an acceleration.

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Q.29 What are the risk included in debt securities?

Default risk can be described as the chance that an issuer of a bond may be inadequate to make timely repayment of interest or administrator on a debt security or to unless comply with the terms of a bond indenture and is also committed to as credit risk.

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Q.30 How do debt covenants operate?

Debt Contract indicates any Assigned Contract that is an mortgage, indenture, loan, credit or sale-leaseback guarantee of any responsibility, bonds, letters of credit or comparable financial agreement that will remain in influence following the Closing.

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Q.31 What do you understand by a benchmark bond?

A benchmark bond is a conventional type of a bond's risk or return upon which other bonds are regulated. Typically, benchmark bonds are on-the-run Repositories, since these are deemed the most extremely rated and liquid debt.

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Q.32 How does the fixed income market operate?

The bond market shifts when expectations vary about economic increase and inflation. Unlike stocks, whose future profits are anyone's opinion, bonds make fixed payments for a definite period of time. The higher their expectations of inflation, the less they will pay for bonds.

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Q.33 Why bonds are a bad investment?

Bond funds are subjected to interest rate risk, and that risk can be quite meaningful, particularly in a low interest rate setting. When interest rates are at famous lows, they have nowhere to move but up. When rates do fasten up, the net asset assessment of the bond fund can weaken significantly.

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Q.34 What is the most significant role of the Federal Reserve?

The Federal Reserve in the United States functions as the country's principal bank. The most powerful means the Fed has to manage monetary system is the selling and buying of the U.S. government protection, which is usually regarded to as open market operations.

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Q.35 What is a Treasury Bill in India?

T-bills or Treasury bills, which are money market tools, are small term debt instruments published by the Government of India and are directly issued in three tenors, namely, 91 day, 182 day and 364 day. Further, treasury bills are 0 coupon securities and pay no interest.

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Q.36 What are common debt covenants?

Common debt covenants need a borrower to adhere to contractual practices in the application of designated actions or situations in the loan agreement. Typical debt covenants cover Cash covenants.

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Q.37 Is stock a debt security?

Equity securities serve a claim on the profits and assets of a company, while debt securities are advances in debt instruments. For instance, a stock is an equity security, while a bond is a debt security.

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Q.38 How do inter dealer brokers earn money?

The interdealer broker earns its money by practicing a small percentage of every trade as commission. As financial markets grow and developing amounts of trading takes site electronically, interdealer brokerage firms are also applying to electronic systems to broke deals among buyers and sellers.

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Q.39 What is the voice brokerage?

Taking out a trade by telephoning a broker, rather than practicing an electronic trading method. Voice broking is common for large-volume businesses or those requiring complex instruments.

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Q.40 How do Treasury bills serve?

Treasury bills have a majority of one year or less, and they do not give interest ere the expiry of the maturity stage. They are sold in sales at a discount from the par amount of the bill. They are allowed with maturities of 28 days (one month), 91 days (3 months), 182 days (6 months), and 364 days (one year).

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Q.41 What is the debt to asset ratio method?

The debt to assets ratio formula is estimated by apportioning total liabilities by total assets. The equation is very simple. It measures total debt as a percentage of total assets.

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Q.42 What are the 5 varieties of bonds?

There are five principal types of bonds which are savings, Treasury, municipal, agency, and corporate. Each kind of bond has several purposes, sellers, buyers, and levels of risk vs. return.

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Q.43 Define repo contract.

A repurchase agreement (repo) is a short-term acquired loan, one party sells securities to different and allows to repurchase those tokens later at a high price. The securities serve as security. The Federal Reserve employs repos and reverse repos to administer monetary policy.

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Q.44 Why do banks practice repos?

A repurchase agreement (repo) is a kind of short-term financing for dealers in government securities. Repos are typically utilized to increase short-term capital. They are also a popular means of central bank open market transactions.

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Q.45 What does a positive yield curve indicate?

An upward slanted yield curve that is defined by interest rates that are more eminent on long-term debt than on short-term debt.

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Q.46 How is yield calculated?

Usually, yield is determined by dividing the dividends or interest earned on a set time either the amount formerly invested or by its popular price.

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Q.47 What is Reverse Repo?

Reverse Repo is a contract in which a security is borrowed with an agreement on the initiation date to replace the security at a higher price on a later date specified in the contract.

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Q.48 When does the long position of the dealer will generally make money?

The long position of the dealer will generally make money under following conditons: 1. The financing costs in the repo markets are relatively low in comparison to the interest income generated by carrying the security. 2. The market value of collateral increases during the term of the repo.

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Q.49 Which factors complicates the task of extracting zero prices from the yield curve?

1. There are very few newly auctioned issues that sell at par at any point. 2. To obtain zero prices for all future maturities, we simply do not have enough information in the yield curve

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Q.50 Which method to remove financial distress, will improve the liquidity of the company but with additional costs?

The existing assets can be partially liquidated.

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Q.51 What is the first step for creation of MBSs?

Pooling of individual residential mortgage loans

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Q.52 How does OIS rate with a term of one week are fully determined?

OIS rate with a term of one week are fully determined by the price of a one-week zero coupon bond.

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