Debt Capital Markets interview preparation

Questions

100

Traced to a firm

45

Firms

26

Updated

September 2026

Asked at

All firmsTSTruist Securities5PIMCO4TD Securities4Apollo Global Management3Nomura3Scotiabank3Bain Capital2Houlihan Lokey2Mizuho2Neuberger Berman2Oaktree Capital Management2RCRBC Capital Markets2Carlyle Group1Deutsche Bank1Golub Capital1HPS Investment Partners1Invesco1KKR1Lazard1Moelis & Company1Moody's1Northern Trust1NUNuveen1Rothschild & Co1S&P Global1Wells Fargo Securities1

Topic

All topicsBond mechanics11Duration and convexity6Yield curve and rates5Credit spreads5Credit analysis and ratings13Credit modelling9Primary issuance9Syndication and loans10Structured credit7Covenants and documentation5Liability management5Indian debt markets7Fit8

Level

AnyCoreIntermediateHard

Type

AnyTechnicalBrainteaserMarket viewCaseFit

1. 001What is a bond, in one sentence, and what do you need to know to price one?Bond mechanicsCorephone / first roundCorporate banking

   Say this

   A bond is a contractual loan cut into tradeable pieces: the issuer promises fixed coupons on a set schedule and the principal back at maturity. To price it you need five things — the cash flow schedule, the maturity, the discount rate, the day count, and where the claim sits in the capital structure.

   Then walk it

   1. The cash flows first: coupon rate times face, paid semi-annually for a US corporate, annually for most euro issues, plus the redemption of par at the end.
   2. Then the discount rate, which is the risk-free rate for that tenor plus a credit spread. Price is just the present value of those cash flows at that rate.
   3. Day count and settlement convention tell you the exact fraction of a period you are in, which is what generates accrued interest.
   4. Seniority and security matter because they drive the spread, not the mechanics. Same issuer, senior secured versus subordinated, can be 200 basis points apart.
   5. One number to anchor it: a 5-year bond with a 5 percent coupon priced at par yields 5 percent. Move the yield to 6 percent and the price falls to roughly 95.8. That is the whole instrument in one line.
   6. The honest limitation: this works for a plain bullet. The moment there is a call, a put or a floating coupon you are pricing an option too, and present value alone stops being enough.

   Where candidates lose it

   Describing a bond as 'debt that pays interest' and stopping. On a DCM desk the question is a warm-up that tests whether you think in cash flows. Name the schedule, the discount rate and the seniority, and say the price is a present value.

   Expect next

   • So what happens to the price if rates rise?
   • How is a floating rate note different?
   • Where does the credit spread come from?
2. 002Explain the relationship between a bond's price and its yield, and why it holds.Bond mechanicsCorephone / first roundFixed income asset management

   Say this

   They move in opposite directions, and it is mechanical rather than behavioural. The coupon is fixed in the contract, so the only way the market can change the return on that fixed stream is by changing what you pay for it.

   Then walk it

   1. Take a 5 percent coupon bond at par. Market yields go to 6 percent. Nobody will accept 5 dollars a year when new issues pay 6, so the price falls until 5 dollars on the lower price plus the pull to par equals a 6 percent return.
   2. Price is the present value of fixed cash flows. Raise the denominator and the numerator cannot respond, so the value falls. That is the entire mechanism.
   3. The relationship is convex, not linear. The price gain from a 100 basis point fall is bigger than the price loss from a 100 basis point rise, because you are discounting with one over one plus y.
   4. Longer maturity and lower coupon both make the price more sensitive, because more of the value sits further out in time.
   5. The one case where it looks broken: a floating rate note barely moves on rate changes, because its coupon resets. Its price moves on credit spread instead.
   6. So the honest version is that price moves inversely with the discount rate. For a fixed coupon that is the yield; for a floater it is the spread.

   Where candidates lose it

   Asserting the inverse relationship as a fact with no mechanism. Interviewers on a debt desk hear that all day. Walk the 5 percent coupon into a 6 percent market out loud, then add that the curve is convex rather than straight.

   Expect next

   • Why is the relationship convex rather than linear?
   • Which falls more for the same rate move, a 2-year or a 30-year?
   • Does a floating rate note behave the same way?
3. 003What is yield to maturity, and how is it different from current yield?Bond mechanicsCoretechnicalPIMCOFixed Income · Sydney · 2025

   Say this

   Yield to maturity is the single discount rate that sets the present value of all remaining cash flows equal to the current price. Current yield is just the annual coupon divided by the price, so it ignores the capital gain or loss you get by holding to par.

   Then walk it

   1. Current yield on a 6 percent coupon bond trading at 90 is 6.67 percent. That is the cash income only.
   2. Yield to maturity on the same bond is higher, maybe 8 percent, because you also collect the 10 points of pull to par over the remaining life. For a discount bond, YTM is above current yield; for a premium bond, below.
   3. YTM is an internal rate of return, so it embeds an assumption people forget: that every coupon is reinvested at the YTM itself. If reinvestment rates are lower, your realised return is lower than the quoted yield.
   4. It also assumes you hold to maturity and the issuer does not default or call. Yield to call on a callable bond is the same calculation run to the first call date, and you quote yield to worst, the lower of the two.
   5. Current yield is still used because it answers a real question for an income investor: what does this pay me per year. It is just not a return measure.
   6. The clean summary: current yield is income, YTM is total return under a strong reinvestment assumption, and yield to worst is what a desk actually quotes.

   Where candidates lose it

   Defining YTM correctly and never naming the reinvestment assumption. That assumption is the entire weakness of the measure, and stating it unprompted is what separates someone who has used the number from someone who has read about it.

   Expect next

   • So when is YTM a misleading measure of return?
   • What is yield to worst?
   • How would you compute realised return instead?

   Reported by candidates at PIMCO (Fixed Income, Sydney, 2025). Source: Wall Street Oasis.

4. 006Why does a bond trade at a premium or a discount to par?Bond mechanicsCorephone / first roundCorporate banking

   Say this

   Because its fixed coupon is no longer the market rate for that risk. Coupon above the market yield means the bond is worth more than par, so it trades at a premium; coupon below means a discount.

   Then walk it

   1. Two things can move the market yield: the risk-free curve and the issuer's credit spread. A bond can go to a discount because rates rose or because the credit deteriorated, and those are completely different stories.
   2. That distinction matters commercially. A high grade bond at 88 because the curve moved 200 basis points is a duration trade. The same price because the issuer got downgraded is a credit trade.
   3. Premium and discount amortise away. Regardless of the path, the price converges to par at maturity, which is the pull to par and is part of your yield.
   4. Tax and accounting consequences differ by jurisdiction. Original issue discount is often accreted into taxable income annually rather than taxed as a gain at the end, which is why some investors dislike deep discount paper.
   5. For an issuer this is why new issues are almost always priced at or very near par: you set the coupon to the market yield on pricing day, so there is nothing to explain to the board.
   6. The limitation: for a callable bond, a big premium is capped, because the issuer will simply call it at 100 or at the call price rather than let you keep a rich coupon.

   Where candidates lose it

   Answering only 'rates moved'. Half the time on a corporate bond it is the spread, not the curve. Separating rate-driven from credit-driven price moves is the answer a debt desk is listening for.

   Expect next

   • How would you tell the difference between a rate move and a credit move?
   • What is original issue discount?
   • Why do new issues price at par?
5. 007What is a zero-coupon bond, and why is its duration equal to its maturity?Bond mechanicsCoretechnicalFixed income asset management

   Say this

   A zero pays no coupon and redeems at par, so you buy it at a discount and the whole return is the accretion. Its duration equals its maturity because there is only one cash flow, and duration is the weighted average time to the cash flows.

   Then walk it

   1. Duration is a time-weighted average of when you get paid, weighted by present value. One payment at year 10 gives a weighted average of exactly 10.
   2. Any coupon bond of the same maturity has duration below its maturity, because some cash arrives early. A 10-year 5 percent coupon bond has Macaulay duration around 7.8.
   3. So zeros are the most rate-sensitive instrument at a given maturity, which is exactly why liability-driven investors and pension funds buy them: maximum duration per unit of capital.
   4. They also have no reinvestment risk, because there are no coupons to reinvest. The quoted yield is the realised yield if you hold to maturity, which is unusual and valuable.
   5. The price maths: a 10-year zero at a 5 percent yield costs about 61. Move the yield to 4 percent and it goes to about 68, an 11 percent gain from 100 basis points. That is the duration working.
   6. The downside for a taxable investor: many jurisdictions tax the imputed accretion each year even though no cash arrives, so zeros are usually held in tax-exempt accounts.

   Where candidates lose it

   Saying 'because there is only one cash flow' without ever defining duration as a weighted average time. The definition is the answer; the single cash flow is just the special case that makes it obvious.

   Expect next

   • What is the modified duration of that 10-year zero?
   • Why do pension funds like zeros?
   • What is a STRIP?
6. 009What is a floating rate note, and when would an issuer prefer one over a fixed coupon?Bond mechanicsCoretechnicalCorporate bankingSyndicate desks

   Say this

   A floater pays a reference rate plus a fixed spread, resetting every quarter, so its coupon tracks the market. An issuer prefers it when it expects rates to fall, when it wants to match floating-rate assets, or when the floating investor base is where the demand actually is.

   Then walk it

   1. Structure: three-month SOFR plus, say, 90 basis points, reset quarterly, paid quarterly. The spread is fixed for life; the base rate is not.
   2. Because the coupon resets, the price stays close to par and rate duration is tiny — roughly the time to the next reset, so about a quarter of a year. But spread duration is full maturity, so it still carries credit risk.
   3. Who issues them: banks and financials, because their loan books are floating and they want to match; and any issuer targeting money market funds and liability-matched buyers who cannot take duration.
   4. Who buys them: funds that want credit exposure without rate risk. In a rising rate environment demand for floaters spikes, and in 2022 to 2023 floater and loan funds took large inflows for exactly that reason.
   5. The issuer can also get to the same place synthetically: issue fixed and swap to floating. Most large issuers do that, choosing the format where the investor demand is best and swapping into the exposure they want.
   6. The limitation: a floater gives the issuer rate uncertainty. If rates rise sharply, the interest bill rises with them, which is precisely what caught out heavily floating-rate leveraged borrowers when policy rates went up 500 basis points.

   Where candidates lose it

   Saying a floater has no duration. It has almost no rate duration but full spread duration, and if the issuer's credit deteriorates the floater falls just like the fixed bond. Confusing the two durations is the classic error on this question.

   Expect next

   • What is the duration of a floater, precisely?
   • How does an issuer swap fixed to floating?
   • Why did loan funds outperform in 2022?
7. 012What is duration, explained the way you would explain it to a client?Duration and convexityCorephone / first roundPIMCODebt Capital Markets · San Diego · 2026

   Say this

   Duration is how much your bond's price moves for a one percent change in yields. A duration of 7 means roughly a 7 percent price fall if yields rise 100 basis points. Underneath, it is the weighted average time until you get your money back.

   Then walk it

   1. Two readings of the same number. Macaulay duration is a time: the present-value-weighted average years to the cash flows, quoted in years. Modified duration is a sensitivity: the percentage price change per 100 basis points.
   2. Modified equals Macaulay divided by one plus the periodic yield, so for normal yields they are close, and people use the words loosely. Say which one you mean.
   3. What makes duration long: long maturity, low coupon, low yield. All three push more of the present value further into the future.
   4. The client version: duration is your interest rate risk budget. A fund with duration 2 loses about 2 percent if rates rise 100 basis points. A fund with duration 15 loses about 15. Same credit, totally different instrument.
   5. It is a first-order approximation, valid for small moves. For a 200 basis point move you need convexity, which corrects the fact that the price-yield curve bends.
   6. And the framing that matters on a debt desk: duration is what a rates trader hedges and what a credit investor tries to neutralise so that what is left is the credit view.

   Where candidates lose it

   Conflating Macaulay and modified duration, or reciting 'weighted average time to cash flows' without ever saying what it is used for. A client and an interviewer both want the sensitivity first, then the definition.

   Expect next

   • So how does duration affect what happens when rates move?
   • What is DV01 and how is it different?
   • How would you reduce the duration of a portfolio?

   Reported by candidates at PIMCO (Debt Capital Markets, San Diego, 2026). Source: Wall Street Oasis.

8. 020What is SOFR, and where is it right now?Yield curve and ratesCorephone / first roundBain CapitalGeneralist · Boston · 2023

   Say this

   SOFR is the Secured Overnight Financing Rate — the volume-weighted rate on overnight Treasury repo, published by the New York Fed. It replaced USD LIBOR as the floating benchmark for loans and derivatives. Quote the current level with the date, because it tracks the Fed's target range almost exactly.

   Then walk it

   1. It is secured and transaction-based, which is the whole point. LIBOR was an unsecured rate based on submitted estimates, which is what made it manipulable and what killed it.
   2. Because it is secured, SOFR sits slightly below where unsecured bank funding would, and it carries no bank credit component. That is why loan documents add a credit spread adjustment, historically around 10 to 26 basis points depending on tenor, when they transitioned from LIBOR.
   3. Loan markets use Term SOFR, a forward-looking 1, 3 or 6 month rate, because borrowers need to know their coupon at the start of the period. Derivatives mostly use compounded overnight SOFR in arrears.
   4. Where to find the number: the New York Fed publishes SOFR every morning at 8am Eastern, and CME publishes Term SOFR. Know today's level and the Fed's target range, and say them with the date.
   5. The quirk worth knowing: SOFR spikes at quarter and year end when repo balance sheets tighten. The September 2019 repo blowup is the extreme case, and it is why the Fed built the standing repo facility.
   6. How to answer if you genuinely do not know the level: say the mechanism, say it tracks the effective fed funds rate within a few basis points, and say the target range. Never guess a precise number.

   Where candidates lose it

   Not knowing the current level. This is a five-second check on whether you follow markets, and on a credit desk where every loan coupon is SOFR plus a spread, not knowing it is disqualifying. Refresh it the morning of the interview, and say it with the date.

   Expect next

   • Why did LIBOR get replaced?
   • What is the credit spread adjustment?
   • What is the difference between Term SOFR and SOFR compounded in arrears?

   Reported by candidates at Bain Capital (Generalist, Boston, 2023). Source: Wall Street Oasis.

9. 029What do rating agencies actually assess?Credit analysis and ratingsCoretechnicalRating agenciesCredit research

   Say this

   Two halves: a business risk profile and a financial risk profile, combined into an anchor rating, then adjusted by modifiers. And the thing candidates miss — a rating is an opinion on relative probability of default over a cycle, not a forecast of next year, and for most corporate scales it says nothing about recovery.

   Then walk it

   1. Business risk: industry cyclicality and competitive dynamics, the company's position within it, scale, diversification by product, customer and geography, and the operating margin's stability through a downturn.
   2. Financial risk: leverage and coverage, cash flow to debt, liquidity, the maturity profile, and above all financial policy — stated leverage targets, dividend and buyback behaviour, and appetite for debt-funded M&A.
   3. The two combine into an anchor on a published matrix, then modifiers adjust it: diversification, capital structure, liquidity, management and governance, and comparable ratings analysis, which is the agency's explicit override.
   4. Parent and government support is the other big modifier. A subsidiary can be rated above its standalone profile on expected parent support, and many bank ratings carry uplift for expected sovereign support.
   5. What it is not: not a buy or sell recommendation, not a price, not a forecast of default in a specific year, and on the issuer scale not a view on how much you recover. Recovery ratings and issue-level notching are separate.
   6. Worth stating the known weakness: agencies are paid by issuers, they were badly wrong on structured finance in 2007, and they are slow through turning points — downgrades lag the market by months. A good credit analyst uses the report for disclosure and does their own work on the conclusion.

   Where candidates lose it

   Listing only the financial ratios. Business risk is usually the bigger driver of the rating, and financial policy is what decides borderline cases. Leaving out the agencies' conflict of interest and their lag also reads as naive — say it before they do.

   Expect next

   • Which matters more, business risk or financial risk?
   • What is comparable ratings analysis?
   • Why do agencies lag the market?
10. 030Where is the line between investment grade and high yield, and why does it matter so much?Credit analysis and ratingsCorephone / first roundLeveraged financeCredit research

    Say this

    BBB minus from S&P and Fitch, Baa3 from Moody's, is the lowest investment grade rung. One notch lower, BB plus or Ba1, is high yield. The line matters because it changes who is allowed to own the bond, not just what it costs.

    Then walk it

    1. The pricing step is real but not the main event. Crossing the line typically widens spread by 100 to 200 basis points, more in a stressed market.
    2. The ownership step is the main event. Many insurance, pension and mandate rules restrict or penalise sub-investment-grade holdings, and index membership changes: the bond leaves the IG index and enters the HY index, forcing mechanical selling by one set of funds and buying by a smaller set.
    3. Structure changes too. IG bonds are typically bullets with light covenants and no call protection beyond a make-whole. High yield comes with a non-call period, a declining call premium, and a full incurrence covenant package.
    4. Bank behaviour changes. Revolvers get smaller and secured, commercial paper access disappears, and derivative counterparties want collateral. The funding model shifts from unsecured and flexible to secured and negotiated.
    5. A fallen angel is an issuer downgraded from IG to HY, and a rising star is the reverse. Fallen angels move markets because the forced seller base is far larger than the natural buyer base — the 2020 downgrades of Ford and Kraft Heinz are the canonical examples, and they widened the whole HY index.
    6. Which is why so many issuers cluster at BBB. Keeping the last IG notch is often an explicit board-level financial policy, and it constrains buybacks and M&A in a way that is genuinely visible in behaviour.

    Where candidates lose it

    Naming the rating boundary and nothing else. The question is really about consequences: investor base, index membership, covenant package and bank access. The forced-seller mechanics of a fallen angel is the detail that shows you follow the market.

    Expect next

    • What is a fallen angel and why does it move the index?
    • Why do so many issuers sit at BBB?
    • How does the covenant package change below the line?

Firm tags come from public, anonymous candidate reports on Wall Street Oasis: strong signal, not sworn testimony. Firms are named as the places a question was reported, not as partners of Fin Maverick. Answers are written for this page to show how to think out loud; they are not scripts to recite.