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. 014What is convexity, and why do investors pay for it?Duration and convexityHardsuperdayFixed income asset management

   Say this

   Convexity is the curvature of the price-yield relationship — the rate at which duration itself changes as yields move. Positive convexity means you gain more when rates fall than you lose when they rise by the same amount, so it is a free asymmetry and investors pay for it in yield.

   Then walk it

   1. Duration is the first derivative, convexity the second. The price change is minus duration times the yield move, plus a half times convexity times the move squared. The squared term is always positive for a bullet bond, whichever way rates go.
   2. Concretely: a bond with duration 10 and convexity 100. Rates fall 100 basis points, you make 10 plus 0.5 percent, so 10.5. Rates rise 100, you lose 10 minus 0.5, so 9.5. That one point of asymmetry is the convexity.
   3. It matters more the bigger the move and the longer the bond. For a 30-year at low yields, convexity can be several points over a 200 basis point move, and ignoring it is a serious mispricing, not a rounding error.
   4. Because it is an asset, it is priced. Two bonds with the same duration but different convexity will not have the same yield: the more convex one yields less. Barbell versus bullet portfolio construction is exactly this trade.
   5. Negative convexity is where the money is lost. Callable bonds and mortgage-backed securities have it: as rates fall, the borrower refinances, so your upside is truncated. You are short an option and the yield is your premium.
   6. The practical honesty: a long-convexity position bleeds carry. You are paying up in yield every day for protection against a big move, and if the move never comes you underperform.

   Where candidates lose it

   Describing convexity as 'the second derivative' and leaving it there. Interviewers want the asymmetry stated in numbers, and they want to hear negative convexity named for callables and MBS, because that is where convexity actually costs people money.

   Expect next

   • Which has more convexity, a barbell or a bullet?
   • Why do mortgage-backed securities have negative convexity?
   • Who pays for convexity and who sells it?
2. 016A bond has modified duration of 7 and convexity of 60. Rates rise 150 basis points. What happens to the price, and how wrong is the duration-only answer?Duration and convexityHardtechnicalFixed income asset managementSyndicate desks

   Say this

   Duration alone says minus 10.5 percent. Convexity gives back 0.675 percent, so the estimate is about minus 9.8 percent. Duration on its own overstates the loss by roughly 68 basis points of price, and the error grows with the square of the move.

   Then walk it

   1. First term: minus duration times the yield change, so minus 7 times 0.015, which is minus 10.5 percent.
   2. Second term: half times convexity times the change squared, so 0.5 times 60 times 0.015 squared. That is 0.5 times 60 times 0.000225, which is 0.00675, or plus 0.675 percent.
   3. Net estimate about minus 9.83 percent. On 100 million of face at par that is a 9.8 million loss rather than 10.5 million — a 675,000 dollar difference from one term.
   4. Note the asymmetry: if rates had fallen 150 basis points, you would gain 10.5 plus 0.675, so 11.17 percent. Convexity helps in both directions, which is why it has value.
   5. Scale it: at a 50 basis point move the convexity term is worth only 7.5 basis points and you can ignore it. At 300 basis points it is 2.7 percent and you cannot. The error is quadratic in the move.
   6. The caveat to state: this is still a two-term Taylor expansion off a single yield. It assumes a parallel shift in the curve, and for a real portfolio you would run key-rate durations instead, because curves twist rather than shift.

   Where candidates lose it

   Dropping the one-half, or forgetting to square the yield move. Both are common and both produce an answer that is wildly wrong. Write the formula out loud before you compute, and state the units — decimals, not percentages — before you multiply.

   Expect next

   • Now do it for a 300 basis point move.
   • What if the curve steepens rather than shifts?
   • What are key rate durations?
3. 017What is spread duration, and how is it different from interest rate duration?Duration and convexityHardsuperdayCredit researchFixed income asset management

   Say this

   Spread duration measures the price change for a one percent move in the credit spread; rate duration measures it for a move in the underlying risk-free yield. For a fixed-rate bullet they are almost identical, but for a floater they are completely different.

   Then walk it

   1. The reason they usually match: price is discounted at the risk-free rate plus the spread, and a 100 basis point move in either component moves the discount rate the same amount. So for a fixed bullet, spread duration is effectively modified duration.
   2. Where they diverge is a floating rate note. Rate duration is about 0.25 years, because the coupon resets quarterly. Spread duration is the full maturity, because the fixed spread over the reference rate does not reset.
   3. That is exactly why leveraged loans and floaters are the instrument of choice for someone who wants credit risk and no duration.
   4. For a credit portfolio it is the risk number that matters. A manager running duration-hedged credit measures spread duration times notional, sometimes called DTS or duration times spread, because spread volatility scales with the level of spread.
   5. The DTS insight worth quoting: a 5-year bond at 500 basis points has roughly the same spread risk as a 10-year bond at 250. Wide credits behave like long duration credits, and a book that ignores this is badly mis-sized.
   6. Limitation: spread duration assumes a parallel shift in the spread curve, and in a credit selloff short-dated distressed paper often widens far more than long-dated, so the linear measure underestimates the tail.

   Where candidates lose it

   Saying they are the same thing. They are the same number for a fixed bullet, and radically different for a floater, a loan or a CLO note. Naming the floater case is what proves you understand why the distinction exists.

   Expect next

   • What is the spread duration of a 7-year leveraged loan?
   • What is duration times spread?
   • How would you hedge spread risk?
4. 022If CUSMA negotiations fall through this summer, what is the impact to the Bank of Canada?Yield curve and ratesHardtechnicalTD SecuritiesDebt Capital Markets · Toronto · 2026

   Say this

   It pulls the Bank in two directions at once, which is the whole point of the question. A trade breakdown is a large negative demand shock to Canadian growth, which argues for cuts, but tariffs and a weaker Canadian dollar push import prices up, which argues against. The Bank would likely cut and lean on the growth side, while flagging the inflation risk.

   Then walk it

   1. The growth channel is direct and large. Roughly three quarters of Canadian goods exports go to the United States, so tariffs or loss of preferential access hits manufacturing, autos and energy hard, and business investment freezes on the uncertainty alone.
   2. The inflation channel runs the other way. Tariffs raise input costs, and the loonie weakens on a worse terms-of-trade outlook, which raises the price of imported goods in Canadian dollars. That is a supply shock.
   3. A central bank facing a supply shock has to judge whether the price rise is a one-off level effect or feeds into expectations. If expectations stay anchored, you look through it and support demand. That is the Bank's stated approach.
   4. So the likely read: cuts, possibly faster than the market currently prices, with the communication emphasising that the inflation impulse is transitory and the output gap is opening.
   5. The complication is the exchange rate and the policy gap with the Fed. Cutting well below US rates weakens the loonie further, which imports more inflation. That constrains how far the Bank can go unilaterally.
   6. For a Toronto DCM desk the practical consequence: the Canadian curve steepens as the front end rallies on cuts, provincial and corporate spreads widen on the growth shock, and the new issue window for anything trade-exposed shuts.

   Where candidates lose it

   Answering with one direction only. The interviewer picked this because it is a growth-versus-inflation conflict, and the mark is for identifying the trade-off and then taking a view with a reason. Also, do not guess at treaty detail you do not know — reason from trade share and the two channels.

   Expect next

   • Which channel dominates, and why?
   • What does that do to the Canadian curve?
   • How does the policy gap with the Fed constrain them?

   Reported by candidates at TD Securities (Debt Capital Markets, Toronto, 2026). Source: Wall Street Oasis.

5. 024Walk me through the different spread measures — I-spread, asset swap spread, Z-spread and OAS. When would you use each?Credit spreadsHardtechnicalSyndicate desksCredit research

   Say this

   They are four increasingly careful ways of asking the same question: how much am I being paid over risk-free for this credit. I-spread is the crude one over an interpolated swap rate; Z-spread discounts every cash flow off the whole curve; OAS strips out the value of any embedded option.

   Then walk it

   1. I-spread, or interpolated spread: the bond's yield minus the swap rate at the same maturity. Fast and fine for quoting, but it compares a single yield number against a single point on the curve, so it ignores curve shape.
   2. Asset swap spread: the spread you earn if you buy the bond and swap the fixed coupons into floating. It is what a funded investor actually realises, and it is the number a syndicate desk uses to compare a new euro issue against outstanding paper.
   3. Z-spread, or zero-volatility spread: the constant spread you add to every point on the zero curve so the discounted cash flows equal the market price. This is the correct measure for a bullet, because it respects the shape of the curve rather than one point on it.
   4. OAS, option-adjusted spread: Z-spread minus the value of the embedded option, computed over simulated rate paths. For a callable high yield bond or an MBS, Z-spread overstates the credit compensation because part of it is the option premium you sold.
   5. So the rule: bullets, use Z-spread. Callables and mortgages, use OAS. Cross-currency or floating comparisons, use asset swap. Quick quotes, I-spread.
   6. One number to show the difference matters: on a callable high yield bond, Z-spread minus OAS can easily be 80 to 150 basis points. Ranking two bonds on Z-spread when one is callable will give you the wrong answer.

   Where candidates lose it

   Using Z-spread and OAS interchangeably. They are identical only when there is no embedded option. Saying 'OAS equals Z-spread for a bullet' unprompted is the single cleanest way to show you understand the family.

   Expect next

   • When are Z-spread and OAS the same?
   • How is OAS actually computed?
   • Which measure would you use to price a new euro issue?
6. 026Which is cheaper right now, US bonds or US equities?Credit spreadsHardtechnicalPIMCODebt Capital Markets · San Diego · 2026

   Say this

   Compare them on a like-for-like yield basis: the equity risk premium against the credit risk premium. Take the S&P earnings yield minus the 10-year Treasury yield, and set that against investment grade and high yield spreads. When the equity risk premium compresses toward the credit spread, bonds are the better paid risk.

   Then walk it

   1. The bond side is observable: the 10-year Treasury yield plus the investment grade spread gives you an all-in corporate yield, and it is contractual, senior and dated.
   2. The equity side needs a proxy. Forward earnings yield, which is one over the forward P/E, minus the Treasury yield gives you a rough equity risk premium. At a 20 times forward multiple that earnings yield is 5 percent.
   3. The comparison that has mattered since 2022: when investment grade yields sit near 5 to 6 percent and the equity risk premium is compressed toward 100 basis points or below, you are being paid almost the same to sit at the top of the capital structure as at the bottom. That is historically unusual and it is the honest case for bonds.
   4. Then the qualifications, which is where the marks are. Equity earnings grow and coupons do not, so in an inflationary world equities have the better long-run real claim. And the earnings yield is a forward estimate, so it is only as good as consensus.
   5. So the answer should be a framework plus a current read plus a horizon. Something like: on today's numbers bonds look better paid on a risk-adjusted basis over three years, equities over twenty.
   6. And say what would change your mind: an inflation re-acceleration hurts the bond case directly, because you lose the real value of a fixed coupon.

   Where candidates lose it

   Picking a side with no metric. The question is testing whether you can make two asset classes comparable, so the framework matters more than the conclusion. Check the current earnings yield and IG spread level the morning of the interview, and state your figures with the date.

   Expect next

   • What is the equity risk premium right now?
   • Does that comparison hold at a 20-year horizon?
   • What would change your view?

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

7. 027Can debt ever be more expensive than equity, and in what scenario?Credit spreadsHardsuperdayTD SecuritiesCapital Markets · New York · 2025

   Say this

   Yes, and it happens regularly in distress. When a borrower is close to default, rescue debt can price at 15 to 20 percent cash plus fees, warrants and PIK, while the equity stub is an out-of-the-money option that costs the sponsor nothing in cash. At that point issuing equity is cheaper than borrowing.

   Then walk it

   1. The normal ordering holds for two reasons: debt is senior so it takes less risk, and interest is tax-deductible so the after-tax cost is lower. Both can break.
   2. The tax shield disappears first. A company with no taxable income gets no deduction, so the after-tax cost of debt equals the pre-tax cost. Interest limitation rules, like the 30 percent of EBITDA cap in the US, do the same thing at high leverage.
   3. Then the risk ordering flips in effect. In distress, existing bonds trade at 20 or 30 percent yields and new money demands super-priority, a 15 percent coupon, 3 points of fees and warrants. All-in that can be 25 percent.
   4. Meanwhile the equity has convexity. A sponsor putting fresh equity into a levered business is buying a long-dated option on recovery, and the required return on that, in the sponsor's own hands, can be lower than the rescue lender's price.
   5. Concrete cases: 2020 pandemic rescue financings and several 2023 to 2024 liability management exercises priced new money at levels no equity investor would have demanded. Sponsors chose to write equity cheques instead.
   6. There is also a mundane version: a small private company with no ratings and no assets may simply not be able to borrow at any price, which is an infinite cost of debt. Availability, not just price, is part of the cost of capital.

   Where candidates lose it

   Answering flatly no because debt is senior and tax-deductible. That is the textbook line and the question exists to test whether you can break it. Name the tax shield disappearing and the distress case, and give an all-in rescue-financing number.

   Expect next

   • What happens to the tax shield if there is no taxable income?
   • Why would a sponsor write an equity cheque instead?
   • How would you price rescue financing?

   Reported by candidates at TD Securities (Capital Markets, New York, 2025). Source: Wall Street Oasis.

8. 036How does operating leverage affect debt versus equity holders?Credit analysis and ratingsHardsuperdayOaktree Capital ManagementCredit · Los Angeles · 2024

   Say this

   Operating leverage amplifies the volatility of EBIT, and because equity is the residual claim, equity holders get the amplified upside and downside while debt holders get amplified downside with no upside. So high operating leverage is straightforwardly bad for a lender and a mixed blessing for a shareholder.

   Then walk it

   1. Mechanism: a high fixed-cost base means a small revenue change produces a large EBIT change. A business with 70 percent fixed costs loses about 2.3 times as much EBIT percentage-wise as its revenue decline.
   2. Take an airline, a steel mill or a semiconductor fab. Revenue down 20 percent can take EBIT down 60 or 70 percent and straight through interest coverage. Same 20 percent decline at a staffing agency, where costs are variable, barely moves EBIT.
   3. For the lender, that translates into a much fatter left tail on coverage and leverage. So you lend less, at a higher spread, with tighter covenants, and you underwrite to a trough EBITDA rather than a mid-cycle one.
   4. For the equity holder it cuts both ways, and in a recovery it is spectacular: the same amplification means EBIT triples off a trough. That is why cyclical equities rally hardest early in a cycle.
   5. The critical interaction is with financial leverage. Operating leverage and financial leverage multiply. A high fixed-cost business at 5 turns of debt is a fundamentally different credit from a subscription business at 5 turns, which is exactly why software gets levered higher than shipbuilding at the same rating.
   6. So the practical rule for a credit investor: set your maximum leverage inversely to operating leverage. And the number to watch is not leverage at all but EBITDA volatility through the last two downturns.

   Where candidates lose it

   Explaining operating leverage correctly and never connecting it to the lending decision. The point the interviewer is testing is that operating and financial leverage compound, so the maximum debt a business can carry depends on its cost structure. Say that out loud.

   Expect next

   • So how much debt would you lend to an airline versus a software company?
   • How do you estimate trough EBITDA?
   • Does high operating leverage ever help a lender?

   Reported by candidates at Oaktree Capital Management (Credit, Los Angeles, 2024). Source: Wall Street Oasis.

9. 038How do you calculate covenant headroom, and how would you monitor it?Credit analysis and ratingsHardtechnicalLeveraged financePrivate credit

   Say this

   Headroom is the percentage EBITDA decline you can absorb before you breach. If the covenant is 5 times net leverage and you are at 4 times, EBITDA can fall about 20 percent before you trip, because 4 divided by 5 is 0.8. Then you sanity-check it against what the business actually does in a downturn.

   Then walk it

   1. For a leverage covenant: headroom equals one minus current leverage over covenant leverage. At 4 times against a 5 times test, that is 20 percent of EBITDA.
   2. For a coverage covenant you do the same on the other side. At 3 times interest cover against a 2 times test, EBITDA can fall a third. Note that a floating rate borrower's headroom shrinks when rates rise even if EBITDA is flat.
   3. Then the definitional work, which is most of the real job. Covenant EBITDA is not reported EBITDA: it includes pro forma run-rate synergies, cost savings, exceptional add-backs and sometimes contributions from acquisitions before they close. Headroom calculated on covenant EBITDA can be double the headroom on reported EBITDA.
   4. Then check the covenant step-downs. Many deals tighten the test over time — 5 times falling to 4.5 in year three — so headroom shrinks on a schedule regardless of performance. That is a calendar risk you can see coming.
   5. Monitoring: quarterly compliance certificates, the gap between reported and covenant EBITDA over time, and the trend in headroom rather than the level. A credit going from 35 percent to 20 percent to 12 percent headroom over three quarters is the signal; the absolute number is not.
   6. The honest caveat: on a covenant-lite deal there is no maintenance test to have headroom against, so you monitor the incurrence ratios and the liquidity runway instead.

   Where candidates lose it

   Calculating headroom off reported EBITDA. Almost every leveraged credit's covenant EBITDA is materially higher because of add-backs, and a lender who has not read the definition is measuring the wrong thing. Also watch for scheduled step-downs, which shrink headroom with no operational cause.

   Expect next

   • How would you test whether the add-backs are real?
   • What happens to headroom when rates rise?
   • How do you monitor a covenant-lite credit?
10. 040The company has filed. What is the recovery on each claim?Credit analysis and ratingsHardcase studyHoulihan LokeyRestructuring · New York · 2026

    Say this

    Build one number and then a waterfall. Estimate the going-concern enterprise value, then allocate it strictly in priority order until it runs out. The claim where the value stops is the fulcrum security, and that is the one that converts into the equity of the reorganised company.

    Then walk it

    1. Step one, the value. Reorganisation EBITDA times a distressed-but-credible multiple, cross-checked against a DCF and any market evidence such as where the debt trades. Say your assumption out loud, because the answer is entirely driven by it.
    2. Step two, the claims, in order: DIP financing and administrative claims first, then priority and secured claims to the extent of their collateral, then unsecured, then subordinated, then preferred, then common. Note that the unsecured portion of an undersecured claim drops down to rank with general unsecured.
    3. Step three, allocate. Worked example: enterprise value 600, admin and DIP 50, first lien 400, second lien 200, unsecured notes 150. Admin takes 50, first lien takes its full 400, leaving 150 for the second lien, which recovers 75 percent and gets the equity. Unsecured notes and below get nothing.
    4. So the second lien is the fulcrum. Above it everything is money-good and cares only about getting paid; below it everything is out of the money and will litigate for option value rather than economics.
    5. And the negotiated reality. Out-of-the-money classes have blocking and litigation rights, so they usually extract a tip — a few points of equity or warrants — to avoid delay. Textbook absolute priority is the starting point, not the outcome.
    6. State your sensitivity: at a 5 times multiple instead of 6, the second lien recovers 25 percent rather than 75 and the fulcrum moves up into the first lien. That is how leveraged the answer is to one assumption.

    Where candidates lose it

    Going straight to the waterfall without first stating an enterprise value and the multiple behind it. The waterfall is arithmetic; the value is the judgement. And forgetting that an undersecured claim splits, with the deficiency ranking as unsecured, is the most common technical error here.

    Expect next

    • Where does the fulcrum move if the multiple is 5 times?
    • How would you value the consideration if it is new equity?
    • Why do out-of-the-money classes get anything at all?

    Reported by candidates at Houlihan Lokey (Restructuring, New York, 2026). Source: Wall Street Oasis.

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.