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. 023What does a credit spread actually compensate an investor for?Credit spreadsIntermediatetechnicalCredit researchFixed income asset management

   Say this

   Four things, and only the first is default. Expected credit loss, the risk that losses come out worse than expected, illiquidity, and a residual that is really just supply and demand for credit risk. Expected loss is usually the smallest component.

   Then walk it

   1. Expected loss is probability of default times loss given default. For a BBB name at roughly 0.2 percent annual default probability and 60 percent loss severity, that is about 12 basis points a year.
   2. But BBB spreads have historically averaged around 150 basis points. So the vast majority of the spread is not compensation for expected default at all.
   3. The rest is: a risk premium for the fact that defaults cluster in recessions exactly when your other assets are falling, so credit losses are systematic and undiversifiable; a liquidity premium, because corporate bonds trade by appointment and bid-offer widens when you most want to sell; and a plain supply-demand residual.
   4. The credit spread puzzle is the academic name for this gap, and it is worth naming. It is why a diversified investment grade portfolio has historically earned a real excess return over Treasuries despite realised losses being tiny.
   5. For high yield the balance shifts. A single-B name at 4 percent annual default probability and 60 percent severity carries about 240 basis points of expected loss against maybe 450 of spread, so default compensation is now a majority of the spread.
   6. The honest caveat: spreads also contain a technical component that has nothing to do with credit. Index inclusion, central bank purchases, and fund flows can move investment grade spreads 50 basis points with no change in fundamentals.

   Where candidates lose it

   Answering 'default risk' and stopping. The interesting fact is that expected default loss explains only a small fraction of investment grade spread, and being able to put numbers on that gap is what makes you sound like a credit analyst rather than a student.

   Expect next

   • So what is the credit spread puzzle?
   • How would you estimate loss given default?
   • Why do spreads widen before defaults rise?
2. 025Your bond's spread tightened 50 basis points, but Treasuries sold off 75. What happened to the price, and how did you do against the index?Credit spreadsIntermediatetechnicalCredit researchFixed income asset management

   Say this

   The all-in yield rose 25 basis points, so the price fell — roughly 1.75 percent on a 7-duration bond. But you outperformed, because the credit component went your way. Absolute return negative, relative return positive, and which one matters depends on the mandate.

   Then walk it

   1. Decompose the yield: yield equals the Treasury yield plus spread. Treasury up 75, spread down 50, so net yield up 25 basis points.
   2. Price effect: minus duration times 25 basis points. At duration 7 that is minus 1.75 percent, before convexity, which claws back a couple of basis points.
   3. Excess return is the part you get paid on as a credit manager. Spread tightened 50 basis points, so excess return over duration-matched Treasuries is roughly plus 3.5 percent at 7 spread duration. You beat the benchmark comfortably while losing money.
   4. This is exactly why credit mandates are measured on excess return and why most credit funds hedge or neutralise duration. The rate call is not what they are hired for.
   5. A real episode to reference: much of 2022 looked like this. Credit spreads were volatile but the dominant loss driver was the 400-plus basis point move in Treasury yields, so credit managers who picked well still delivered double-digit negative total returns.
   6. The thing to add unprompted: if your investor measures you on total return, a correct credit call does not save you. Explaining a negative absolute number to a client who does not distinguish the two is a real part of the job.

   Where candidates lose it

   Answering only one of the two questions. There are two: what happened to the price, and how did you do. Give both, with the arithmetic, and name excess return explicitly. Missing the sign on either component is the fast way to fail this.

   Expect next

   • How would you have hedged out the rate move?
   • What is excess return and how is it calculated?
   • Which matters more to your client?

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.