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. 011Explain a callable bond and a puttable bond. Who holds the option, and what does it do to the yield?Bond mechanicsIntermediatetechnicalFixed income asset managementLeveraged finance

   Say this

   The issuer holds the call, the investor holds the put. A callable bond must yield more than an otherwise identical bullet, because the investor sold an option; a puttable bond yields less, because the investor bought one.

   Then walk it

   1. The issuer calls when it is in the money for them, which is when rates or spreads have fallen and they can refinance cheaper. So the investor loses exactly when holding would have paid best.
   2. That is negative convexity. As yields fall, the callable bond's price stops rising because it gets pinned near the call price. You get the downside of rates rising and a capped upside when they fall.
   3. Which is why you quote yield to worst, and why option-adjusted spread exists: OAS strips out the value of the embedded option so you can compare the callable against a bullet on credit alone.
   4. High yield bonds are almost always callable after a non-call period, typically non-call 2 or 3 on a 5-year, with a declining call premium. That is deliberate: sponsors want the right to refinance once the credit improves.
   5. A put works the other way. The investor can hand it back at par on a set date, usually protecting against a credit event or a change of control, so it is worth paying up for.
   6. The practical number: a callable high yield bond might yield 100 to 150 basis points more than a comparable bullet from the same issuer, and most of that gap is the option, not extra credit risk.

   Where candidates lose it

   Saying a callable bond yields more 'because it is riskier'. It is not more credit risky — it is the same issuer. The extra yield is the premium for an option you sold, and the concept the interviewer wants named is negative convexity.

   Expect next

   • What is negative convexity, and why does it matter here?
   • What is a make-whole call?
   • How does OAS help you compare the two?
2. 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.

3. 013What is DV01, and how would you actually use it on a desk?Duration and convexityIntermediatetechnicalSyndicate desksFixed income asset management

   Say this

   DV01 is the dollar change in the value of a position for a one basis point move in yield. It converts a percentage sensitivity into money, which is what you need to size a hedge.

   Then walk it

   1. The arithmetic: DV01 is roughly modified duration times market value times 0.0001. On 100 million of a bond with duration 7, that is about 70,000 dollars per basis point.
   2. Why money rather than percent: you cannot hedge a 7 percent sensitivity, you hedge 70,000 dollars a basis point. So you sell enough Treasury futures or pay enough on a swap to produce minus 70,000 a basis point.
   3. The hedge ratio is just the ratio of the two DV01s. If the cheapest-to-deliver 10-year note has a DV01 of 780 dollars per contract per basis point, you need about 90 contracts.
   4. It is also how risk limits are written. A syndicate or trading desk carrying a new issue overnight has a DV01 limit, not a duration limit, because the risk manager cares about dollars at stake.
   5. Related measures on the same logic: CS01 or spread DV01 for a one basis point move in credit spread, and that is the number a credit desk watches, because their rate risk is hedged out.
   6. The limitation: DV01 is linear and local. For large moves convexity matters, and for a callable bond DV01 itself changes as rates move, so you re-hedge rather than set and forget.

   Where candidates lose it

   Defining DV01 and stopping. The question is 'how would you use it', so give the hedge ratio. If you cannot say that the hedge is the ratio of DV01s, the answer reads as textbook.

   Expect next

   • Work out the DV01 on 250 million of a 5-duration bond.
   • What is CS01?
   • How would you hedge the rate risk on a new issue you are holding overnight?
4. 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?
5. 015Two bonds have the same maturity but different coupons. Which has the longer duration, and why?Duration and convexityIntermediatetechnicalFixed income asset management

   Say this

   The lower coupon bond. Duration is the present-value-weighted average time to the cash flows, and a low coupon puts proportionally more of the value in the final principal payment, which is the most distant cash flow.

   Then walk it

   1. Think of the weights. A 10-year 8 percent bond returns a lot of cash early, so the weighted average time is pulled forward. A 10-year 2 percent bond has almost all its value in the redemption at year 10.
   2. The limiting case proves it: a zero-coupon bond has no early cash flows at all, so its duration equals its maturity, which is the maximum possible for that tenor.
   3. Numbers: at a 5 percent yield, a 10-year 8 percent coupon bond has Macaulay duration around 7.1, a 4 percent coupon around 7.9, and the zero is 10.0.
   4. The same logic explains the other two drivers. Longer maturity extends the weighting, and a lower yield reduces the discounting of distant cash flows, so both lengthen duration.
   5. The practical consequence: low-coupon long-dated bonds issued in the zero-rate era carry enormous duration, which is why the 2022 rate move produced 40 percent-plus drawdowns on some sovereign long bonds.
   6. One qualification: this holds for bullets. A callable low-coupon bond may have shorter effective duration than the maths suggests, because the option truncates it.

   Where candidates lose it

   Guessing. It is a two-way question and half of candidates answer higher coupon because they think more cash flow means more sensitivity. Go back to the weighted-average-time definition and the zero-coupon limiting case, and the answer is forced.

   Expect next

   • So what is the maximum duration a 10-year bond can have?
   • What if one of them is callable?
   • Why did long sovereign bonds fall so hard in 2022?
6. 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?
7. 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?
8. 018What drives the shape of the yield curve?Yield curve and ratesIntermediatetechnicalFixed income asset management

   Say this

   Three things stacked on top of each other: where the market thinks policy rates are going, a term premium for holding duration, and supply and demand at specific maturities. The front end is almost entirely central bank expectations; the long end is mostly term premium and flows.

   Then walk it

   1. Expectations first. The 2-year is roughly the average expected policy rate over two years, so if the market prices cuts, the front end falls and the curve steepens from the front.
   2. Term premium second. Lending for 30 years carries inflation and policy uncertainty you cannot diversify, so investors demand extra yield. That premium expands when inflation is volatile and compresses when it is boring.
   3. Supply and demand third, and it is bigger than textbooks suggest. Pension and insurance demand anchors the long end; heavy government issuance at a particular tenor cheapens it. Quantitative easing suppressed term premium directly by taking duration out of the market.
   4. Put it together for the standard shapes. Upward sloping is the normal state: rates expected stable and a positive term premium. Inverted means the market expects cuts, which usually means it expects a slowdown. Humped usually means near-term hikes followed by cuts.
   5. A real example: the US curve inverted through 2023 with 2s10s at about minus 100 basis points at the extreme, then steepened back as cuts got priced. Same curve, two completely different messages about the cycle.
   6. The honest caveat: you cannot separate expectations from term premium observably. Models like ACM decompose them, and they disagree. So be careful about claiming the curve is 'predicting' anything specific.

   Where candidates lose it

   Giving only the expectations story. If the curve were pure expectations, the term premium would be zero and 30-year bonds would be as safe as bills. Naming term premium and supply-demand is what makes the answer sound like a rates desk rather than a textbook.

   Expect next

   • What is the term premium and can you observe it?
   • Why did QE flatten the curve?
   • What does an inverted curve tell you?
9. 019What does an inverted yield curve tell you, and what does it not tell you?Yield curve and ratesIntermediatetechnicalCredit researchFixed income asset management

   Say this

   It tells you the market expects policy rates to be lower in future than they are now, which usually means it expects growth to weaken. It does not tell you when, it does not tell you by how much, and it is not itself a cause of anything.

   Then walk it

   1. Mechanically, the long rate is an average of expected short rates plus a term premium. For the long rate to sit below the short rate, the market must be pricing meaningful cuts.
   2. The historical record is genuinely strong: 2s10s inversion has preceded every US recession since the 1960s. But the lag has ranged from about 6 to 24 months, which makes it useless as a timing tool.
   3. It has also produced false signals, and the 2022 to 2024 inversion is the live example — the deepest inversion in forty years without the recession arriving on schedule. Anyone who positioned purely on the signal lost money for two years.
   4. What it does to a DCM desk is concrete and immediate. Inversion means short funding costs more than long funding, so issuers term out debt and the long end of the new issue calendar gets busy. It also crushes bank net interest margins, because banks borrow short and lend long.
   5. For credit specifically, inversion plus tight spreads is the uncomfortable combination: the rates market is pricing a slowdown and the credit market is not. That divergence is worth flagging in an interview because it is a real analytical tension.
   6. The limitation to state: it is a market expectation, not a forecast with a track record of calibration. And the curve can un-invert either because growth recovers or because the front end collapses in a crisis — same shape change, opposite story.

   Where candidates lose it

   Saying 'an inverted curve predicts a recession' as a flat fact. The 2022 to 2024 episode is the obvious counter and an interviewer will produce it. Give the mechanism, then the record, then the false-signal caveat, then what it means for issuance.

   Expect next

   • So why did the 2022 inversion not produce a recession on schedule?
   • What does inversion do to bank margins?
   • Which part of the curve do you watch, 2s10s or 3m10y?
10. 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.

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.