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?

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.