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. 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?
3. 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?
4. 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.

5. 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.

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.