Derivatives Foundation interview preparation

Questions

100

Traced to a firm

29

Firms

19

Updated

September 2026

Asked at

All firmsMSMorgan Stanley4Nomura4Akuna Capital2Amundi2HSBC2PIMCO2Bank of America1Barclays1Citadel1DRW1Goldman Sachs1Jane Street1Millennium Management1Mizuho1Old Mission Capital1RCRBC Capital Markets1Scotiabank1UBS1Wells Fargo Securities1

Topic

All topicsForwards and futures10Options basics8Option pricing7The Greeks10Volatility7Option strategies9Swaps and rates7Credit derivatives4Market structure and clearing6Indian derivatives8Trading and markets9Brainteasers6Fit9

Level

AnyCoreIntermediateHard

Type

AnyTechnicalCaseMarket viewBrainteaserFit

1. 054How does duration affect interest rate risk?Swaps and ratesIntermediatetechnicalPIMCODebt Capital Markets · San Diego · 2026

   Say this

   Duration is the sensitivity of a bond's price to a change in yield, in years. A duration of 7 means a 100 basis point rise in yields costs you roughly 7 percent of value. So duration is not a description of the bond's maturity — it is the size of your interest rate exposure, and it is what you hedge.

   Then walk it

   1. Macaulay duration is the weighted average time to receipt of the cash flows. Modified duration divides that by one plus the yield, and it is the number you use for price sensitivity.
   2. The working formula: percentage price change is approximately minus modified duration times the yield change. Add convexity for large moves — plus a half times convexity times the yield change squared — because the price-yield relationship is curved, not linear.
   3. Convexity is your friend as a bondholder: it means you lose less on a rate rise than duration alone predicts and gain more on a fall. Which is also why convexity costs something in the price.
   4. The drivers: longer maturity, lower coupon and lower yield all raise duration. A zero-coupon bond's duration equals its maturity, which is the cleanest case and the reason zeros are the sharpest rate instrument.
   5. How it gets used: dollar duration, meaning duration times market value, is what you actually hedge. If a 500 million portfolio has duration 7, its dollar duration is 35 million per 100 basis points, and you short enough bond futures or pay fixed on enough swap notional to offset it.
   6. The limitation to volunteer: duration assumes a parallel shift in the curve. Real curves steepen, flatten and twist, so a duration-matched portfolio can still lose money on a curve move. That is why desks look at key rate durations bucketed along the curve rather than one number. And for callable or mortgage-backed bonds, duration itself changes with yields — negative convexity — so the static number misleads exactly when you need it.

   Where candidates lose it

   Defining duration as average time to cash flows and stopping. The question asks about risk, so lead with the sensitivity reading and the dollar duration hedge. And name the parallel-shift assumption — a bond manager will expect key rate durations to come up.

   Expect next

   • What does convexity add?
   • How would you hedge the duration of a 500 million portfolio?
   • Where does duration break down as a risk measure?

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

2. 056Given a portfolio of three bonds, explain how the portfolio changes if duration increases.Swaps and ratesIntermediatetechnicalPIMCOGeneralist · Los Angeles · 2026

   Say this

   Portfolio duration is the market-value-weighted average of the individual durations, so if it increases you have become more exposed to rates — you gain more when yields fall and lose more when they rise. The question is which lever moved it: the weights, a change in the bonds themselves, or a shift in yields.

   Then walk it

   1. Start with the arithmetic. Say a 2-year at 30 percent weight with duration 1.9, a 10-year at 40 percent with duration 8.2, and a 30-year at 30 percent with duration 19. Portfolio duration is 0.57 plus 3.28 plus 5.7, about 9.6 years.
   2. Shift 10 percent from the 2-year into the 30-year and duration goes to about 11.3. So the sensitivity per 100 basis points has gone from 9.6 percent of value to 11.3 — you have added roughly 1.7 percent of NAV per 100 basis point move.
   3. Duration can also rise without you trading. Yields falling raises duration mechanically, and the long bond's weight in the portfolio grows because it rallied most. So a bull market in bonds lengthens your duration passively, which is a real drift risk in an unmanaged book.
   4. The long bond dominates. It is 30 percent of the money and nearly 60 percent of the risk, and that concentration is the first thing I would point out. Weighting by market value tells you nothing about where the risk sits; dollar duration does.
   5. Convexity rises too, and non-linearly, so the portfolio becomes more asymmetric: better in a large rally than duration predicts, better than a shorter portfolio in a large selloff too, relative to its own duration.
   6. Two limitations to volunteer. First, averaging durations assumes a parallel shift — this portfolio is really a bet on the whole curve, and a flattening would hurt the 30-year and help the 2-year regardless of the average. Second, if any bond has credit risk, the spread duration is a separate exposure, and in a selloff spreads and rates often move together.

   Where candidates lose it

   Answering qualitatively — 'more rate sensitive' — without doing the weighted average. Put numbers on it, then make the two real points: the long bond carries most of the risk despite a modest weight, and duration drifts upward on its own in a rally. That is what a fixed income manager wants to hear.

   Expect next

   • Which bond carries most of the risk, and is that what the weights suggest?
   • How would you bring the duration back down without selling the long bond?
   • What if the curve flattens instead of shifting in parallel?

   Reported by candidates at PIMCO (Generalist, Los Angeles, 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.