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. 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?
3. 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?
4. 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.

5. 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.

6. 046Does PIK financing increase or decrease enterprise value?Credit modellingHardtechnicalMoelis & CompanyInvestment Banking · Los Angeles · 2026

   Say this

   Neither, directly. Enterprise value comes from operating cash flows and financing does not change them. What PIK changes is the bridge: the interest accrues onto the principal, so net debt grows every year and, at a constant enterprise value, equity value shrinks.

   Then walk it

   1. PIK means pay in kind — the interest is not paid in cash, it capitalises. A 12 percent PIK on 100 becomes 112 after a year and 125 after two, so the debt claim compounds.
   2. EBITDA and unlevered cash flow are untouched, so enterprise value in theory is untouched. Financing does not create operating value.
   3. The bridge is what moves. Equity value equals enterprise value less net debt, and net debt is rising by the accrual every year. The equity is being eaten from below even if the business performs exactly to plan.
   4. Real second-order effects that can move enterprise value: preserving cash today can fund growth capex or an acquisition that genuinely raises future EBITDA, which supports value. And PIK accrual may not be currently cash-tax deductible in the same way as cash interest, which weakens the tax shield.
   5. Why it exists: it gives a borrower who cannot service cash interest room to grow into the structure, and it gives the lender a high headline return. Private credit funds have used PIK heavily since 2022 precisely because floating rate cash coupons became unaffordable for borrowers underwritten at 2021 rates.
   6. The thing to say unprompted: rising PIK share in a private credit portfolio is a warning indicator, because it means income is being accrued rather than collected. That is a real supervisory concern, not a technicality.

   Where candidates lose it

   Saying enterprise value falls because debt rose. Debt is not part of enterprise value — it is part of the bridge to equity. Confusing the two is exactly the error the question is built to expose.

   Expect next

   • So what happens to the equity over a five-year hold?
   • When would a lender insist on PIK rather than cash pay?
   • Why is rising PIK a warning sign in private credit?

   Reported by candidates at Moelis & Company (Investment Banking, Los Angeles, 2026). Source: Wall Street Oasis.

7. 063What is market flex, and how does it work in practice?Syndication and loansHardsuperdayLeveraged financeSyndicate desks

   Say this

   Flex is pre-agreed permission in the commitment letter for the arranger to change the terms of the loan in order to clear the market. Usually pricing flex of 100 to 150 basis points, plus structural flex to shift money between tranches, add an original issue discount or tighten a term. It is the arranger's insurance against underwriting risk.

   Then walk it

   1. Where it lives: the fee letter and commitment letter, negotiated hard before signing. The sponsor wants narrow flex and caps; the bank wants wide flex because it is the only thing standing between it and a hung deal.
   2. Pricing flex is the main lever: permission to increase the margin by, say, 150 basis points, sometimes with a sub-cap on how much can come from OID rather than spread. There is often reverse flex too, letting the arranger tighten pricing if the book is hot — and the savings usually accrue to the borrower.
   3. Structural flex is the second lever: move quantum from the institutional term loan into a secured bond, shorten a maturity, add amortisation, reallocate between first and second lien, or move debt from holdco to opco.
   4. Documentation flex is the third: tighten a covenant, reduce a basket, restrict the EBITDA add-back definition. In 2022 this was used heavily, because investors were pushing back on documentation as much as on price.
   5. The economic consequence for the sponsor: flex raises the cost of the LBO after they have signed the purchase agreement, which can materially change the IRR. That is why flex caps are among the most negotiated provisions in any commitment letter.
   6. A live example of scale: in the second half of 2022, several large underwritten LBO financings flexed to the cap and still could not clear, which is how banks ended up holding multi-billion dollar hung positions and selling paper at 80 to 90 cents.

   Where candidates lose it

   Describing flex as the bank freely repricing at will. It is a negotiated, capped right, and the caps are the commercially important part. If you cannot say roughly how wide typical pricing flex is, the answer reads secondhand.

   Expect next

   • What is reverse flex and who benefits?
   • What happens when flex is exhausted?
   • How would a sponsor negotiate the flex caps?
8. 070Explain how a CLO works, including the payment waterfall and the coverage tests.Structured creditHardsuperdayStructured creditLeveraged finance

   Say this

   A CLO is an actively managed fund financed with tranched debt. It buys a pool of 150 to 250 broadly syndicated leveraged loans, funds them with AAA down to BB notes plus an equity tranche, and pays out through a strict waterfall. The coverage tests are the protection mechanism: if they trip, cash is diverted from the equity to pay down the seniors.

   Then walk it

   1. Capital structure of a typical 400 million US CLO: roughly 62 to 65 percent AAA, then AA, A, BBB, BB, and 8 to 10 percent equity. The AAA is the cheapest liability and it is what makes the arbitrage work.
   2. The arbitrage: the loan pool yields SOFR plus, say, 350, and the weighted average cost of the debt tranches is SOFR plus maybe 200. The equity captures the difference on a levered basis, which is why CLO equity targets low-to-mid teens returns.
   3. The interest waterfall in order: senior fees and expenses to the trustee and manager, then interest on the AAA, then AA, then A, then BBB, then BB — with the coverage tests checked between tranches — then subordinated management fee and incentive fee, then residual to equity.
   4. The two tests. Overcollateralisation is the par value of the collateral divided by the par of the notes at that level, and it must exceed a threshold. Interest coverage is collateral interest over note interest. If an OC test fails, the waterfall stops paying junior tranches and diverts cash to redeem senior notes until it is cured.
   5. The related mechanics that bite before the OC test does: CCC bucket limits, usually 7.5 percent, above which excess CCC holdings get carried at market value rather than par, and haircuts on defaulted assets. Those haircuts are what pushes OC down, so a wave of downgrades hits equity distributions long before any default losses do.
   6. The honest limitation: CLOs survived 2008 and 2020 with essentially no AAA losses, which is genuinely impressive. But the protection comes from par subordination and the diversion triggers, and both depend on the collateral being marked at par — so a long slow grind of downgrades without defaults is the scenario that actually hurts equity.

   Where candidates lose it

   Calling a CLO a CDO of subprime mortgages. They are different asset classes with completely different track records — CLO AAA tranches have never taken a principal loss. And if you cannot explain what happens when the OC test fails, you have not understood the structure's whole defence mechanism.

   Expect next

   • What happens to equity distributions when the CCC bucket is breached?
   • Why have CLO AAAs never lost principal?
   • What is the reinvestment period and why does it matter?
9. 071What section of the indenture deals with payment waterfalls?Structured creditHardtechnicalNomuraStructured Products · New York · 2026

   Say this

   In a US CLO indenture it is the Priority of Payments, which sits in the article on application of monies — conventionally Section 11.1, with the interest and principal waterfalls set out as separate subsections. Numbering varies by counsel and form, so the honest answer is to name the defined term and the article rather than insist on a number.

   Then walk it

   1. The defined term is what matters: Priority of Payments. That is what you cite in a credit memo, and it is what the trustee applies on each payment date.
   2. It normally sits in Article XI, headed something like Application of Monies, with Section 11.1 giving the disbursements from the payment account and separate clauses for interest proceeds and principal proceeds.
   3. The provisions you read alongside it: Article XII or the equivalent for the collateral quality tests and coverage tests, the Sale of Collateral Obligations provisions, and the definitions section, which is where Interest Proceeds, Principal Proceeds and Adjusted Collateral Principal Amount are defined. The definitions do more work than the waterfall itself.
   4. For corporate high yield indentures the structure is different — priority comes from the intercreditor agreement and the security documents rather than from a waterfall section in the indenture, and that distinction is worth drawing if the interviewer means a corporate deal.
   5. The practical version of this answer, which is what a structured products desk actually wants: you find it by going to the definitions for Interest Proceeds, then following the cross-references. Nobody navigates a 400-page indenture by remembering section numbers.
   6. And the honest caveat that plays well: forms differ between managers and law firms, and a 2016 vintage and a 2025 vintage from the same manager can be numbered differently. So I would name the term, not a number, and check the specific document.

   Where candidates lose it

   Confidently asserting a section number for all indentures. Forms vary, and someone on a structured products desk will know that. Naming the defined term Priority of Payments, placing it in the application-of-monies article, and saying you would check the specific document is the credible answer.

   Expect next

   • Where would you find the coverage tests?
   • How does priority work in a corporate high yield deal instead?
   • Which definitions would you read first?

   Reported by candidates at Nomura (Structured Products, New York, 2026). Source: Wall Street Oasis.

10. 072What are the different types of accounts in a CLO new issue settlement?Structured creditHardsuperdayNomuraStructured Products · New York · 2026

    Say this

    The trustee holds a set of segregated accounts, each with a defined purpose in the waterfall. The main ones are the payment account, the collection account split into interest and principal, the ramp-up or unused proceeds account, the revolver or delayed-draw reserve account, the expense reserve account, the interest reserve account, and the custodial account holding the collateral.

    Then walk it

    1. Collection account: where all cash from the loan portfolio lands, kept in two sub-ledgers, interest proceeds and principal proceeds, because the waterfall treats them differently. Misclassifying a payment between the two directly changes what equity receives.
    2. Payment account: the trustee moves money here shortly before a payment date and disburses it strictly per the Priority of Payments.
    3. Ramp-up or unused proceeds account: at closing the CLO has raised cash but has not yet bought all the loans. Undeployed note proceeds sit here during the ramp-up period, usually three to six months, until the portfolio reaches target par.
    4. Expense reserve account: funded at closing to pay the upfront legal, rating and structuring costs, plus ongoing administrative expenses, so that fees do not eat into the first payment date's interest proceeds.
    5. Interest reserve account: funded at closing on many deals to cover the first payment date's note interest, because the portfolio has not yet generated a full period of income during ramp-up.
    6. Revolver funding or delayed-draw reserve account: if the CLO holds revolving or delayed-draw loans, it must hold cash to meet future funding obligations, so that cash is segregated and unavailable to the waterfall.

    Where candidates lose it

    This is a genuine operational-detail question and you either know it or you do not. If you do not, do not bluff a list — name the collection account, the payment account and the ramp-up account, explain why segregation matters for the waterfall, and say you would confirm the full set from the indenture.

    Expect next

    • Why is interest kept separate from principal proceeds?
    • What is the ramp-up period?
    • Why does a CLO need an interest reserve at closing?

    Reported by candidates at Nomura (Structured Products, 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.