Having a job in the capital markets sure is lucrative, and it is one of the best career options. If you have a passion for the stock market and comprehensive knowledge of financial markets, kickstarting a career in capital markets will not be difficult. Also, with our compiled list of popular capital markets interview questions, we are sure you will ace the interview with flying colors.

One can take up various job roles in this field, including Banking & Capital Markets Manager, Merchant Banker, Fund Manager, Stock Broker, and more. Let us also find out the most frequently asked questions by aspiring professionals like yourself.

1. What are the questions asked in the capital market interview?
2. What are the basics of the capital market?
3. What are the 3 capital markets?
4. What is the role of capital markets?
5. How do capital markets work?
6. What is an example of a capital market?
7. What are the two types of capital markets?
8. What are the instruments of the capital market?
9. What are the benefits of the capital market?

Table of Contents

Introduction

A capital market is a financial market in which long-term debt or equity-backed securities are traded. Capital markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments. It is a market for securities where companies and governments can raise long-term funds. It is a collection of markets where money is invested for long-term purposes. This blog on Capital Market Interview Questions covers the most critical questions you should look out for and expect during the interview process.

Capital markets interviews are conducted to assess a potential candidate’s ability to analyze and provide insights into the current state of the markets. The interviewers will be looking to gauge the candidate’s market knowledge, analytical skills, and ability to communicate their thoughts clearly and concisely.

Top 30 Capital Market Interview Questions

Basic HR Interview Questions

Introduce yourself or tell me about yourself — (name, an essential quality, position) 

This is one of the regular and commonly asked questions in any interview, whether a job interview, MBA interview, or any other circumstances. It’s essential to know about the candidate to the interview panel members. Remember that with this question, you have the chance to set the tone of your interview, connect with the highlights of your application, and introduce the key points you want to communicate to the interviewer. The answer to this question provides a kind of road map to the panel members, and the following questions should build upon the narrative you establish with this answer.

Check out how to answer the “tell me about yourself” question.

What are your strengths?

Interviewers wish to see how honest you are about your capabilities and whether you are confident about yourself. Tactfully answer this question highlighting the strengths of your character as a professional. Like my biggest strength is that I am a dedicated professional for my role. Money isn’t the only driving factor that lures me towards a job. I am keen on joining as a capital market consultant because I am passionate about working in this sector. I am dedicated enough to direct my entire focus in learning and gaining new experience every moment and make myself better at the job each day.”

Check out how to answer “what are your strengths” here.

Where do you see yourself after 5 to 10 years down the line?

Recruiters would like to see your future plan, dedication, preparation towards the goal, and ambition to decide whether you are a capable candidate who wishes to prosper. Inform honestly how you plan to grow in your career and where you would like to reach in the 5 to 10 years down the line. You may talk about a senior level or a high job profile related to the profession.

Five years or 10 years is a lot of time for me to try and update my skills in this particular career I am interested in. I hope that with my dedication and 100% effort, I can easily reach the position of my expectation.

What are the qualities required to be successful In Capital Market?

I trust that a person requires more than qualifications to work in the stock market or capital market. Degrees are required because you must be qualified to grasp finance and the stock market’s operational activities. However, a person must be well-known in the stock market and have access to the most recent updates. To perfect the function of a financial consultant or advisor, they must also have strong communication and negotiation abilities. Furthermore, making informed decisions about the stock market’s future and the risks and rewards of investment is critical.

Capital Market Interview Questions

What Does Capital Market Mean? How Does The Company Raise Funds In The Capital Market?

This is by far the most basic capital market interview question. The capital market is also known as the financial market, where companies can raise their long-term capital. In this market, they can trade, i.e., buy and sell long-term instruments like equity shares and debt securities. The capital market is classified into two categories – Primary market and secondary market. 

Capital markets are where savings and investments are channeled between the public, people or institutions with capital to lend or invest, and those in need. Suppliers typically include banks and investors, and Majorly those who seek capital are businesses, governments, and individuals.

Companies/Corporations have four methods that are used to raise funds in the capital market.

• Equity shares/Ordinary stock– If the company wants to raise funds, it means they have an excellent option to get the funds’ equity shares are a suitable option available for the companies. The investors also look at past records (like financial statements, dividends distribution, or credit rating for the instruments) and get interested if the company pays high or reasonable dividends.  Value of shares increases if investors expect the market value to rise.
• Bonds- A bond is an amount of money that has to be given at a maturity date or when they redeem the bonds. Bondholders receive a regular interest payment at predetermined interest rates. Corporations issue bonds because interest rates that must pay investors are lower than rates of borrowing, and holders, can sell bonds to someone else before the maturity period.
• Preference shares- The company chooses this to raise capital. If a company has financial trouble, the buyers of shares get special status. If profits are limited, then owners will be paid the dividend after bondholders receive the interest.
• Debentures- companies used to raise medium-term or long-term capital by getting the debt capital from investors or public, or other sources. First, preference will be given to the debt holder during the payment of interest and repayment of the investment.

What are the major elements/components of the capital market?

There are three major elements/components are there namely-

1. Primary market- In the primary market, also known as the new issue market or fresh issue market, only IPOs ( Initial Public Offerings), so the name indicates that initially, they issue the securities or newly issued shares sold only in the primary market. The primary market does not include borrowed finance in the form of loans from financial institutions because when a loan is issued from a financial institution, it implies converting private capital into public capital. This process of converting borrowed capital into public capital is called going public. The common securities issued in the primary market are equity shares, Preference shares debentures, bonds, preference shares, and other innovative securities.
2.  Secondary market- In the secondary market, all the existing securities are traded in the market. In secondary markets, securities are not issued or traded by the company to investors. Existing investors sell the securities to other investors. Sometimes the investor needs cash, and another investor wants to buy the shares of the company as he could not get it directly from the company. Then both investors can meet in the secondary market and exchange securities for cash through a broker intermediary.

In the secondary market, companies do not get any additional capital as securities are bought and sold between investors only so directly there is no capital formation. Still, the secondary market indirectly contributes to the capital formation or increase in the market value of shares by providing liquidity to the securities of the company.

What are the major roles played by consultants in a capital market?

A professional in the capital market must have a thorough knowledge of the stock markets in and out of the market condition. They must be up-to-date with the recent events to predict exactly and help in trading shares, bonds, and securities. Moreover, they must effectively advise high-profile individuals and organizations about optimal investment, the right time to buy or sell, and increase profits. Financial planning and giving accurate analytical advice to clients are two important aspects of the job role in the capital market.

What are the limitations Of Capital Budgeting? 

• The huge amount involved in capital budgeting, so the decision has to be taken very carefully.
• The techniques of capital budgeting require estimation of future cash flows (inflow and outflow of cash flows)
• Dependency of the information
• The problem of measuring future uncertain circumstances or situations.

What Are The Techniques Available For Evaluation Of Capital budgeting? 

There are 7 tools, namely:

1. Net present value (NPV)
2. Payback Period (PBP)
3. Discounted payback period
4. Accounting Rate of Return (ARR)
5. Internal Rate of Return (IRR)
6. Modified Internal Rate of Return (MIRR)
7. Profitability Index (PI)

What is NPV (Net Present Value)? What Are Its Acceptance Rules, Their Advantages, And Disadvantages?

In most capital market interviews, this is a technical question to test your in-depth knowledge of the topic or concepts. 

Net present value and Payback period methods are traditional methods of investment decisions. Net Present Value is a term that shows the cash flow or EBIT (Earning before interest and tax) worth of the company. It denotes both the cash inflow and outflow and is calculated as the sum of the cash flow values.

It is a standard tool for capital budgeting analysis. It helps to calculate discounted cash flow and if we have a positive NPV, then accept the project, and if there is a negative NPV, reject the project. The formula for N P V is Cash flow (1 + i) t − initial investment.

Advantages of NPV

• It considers the time value of money (Present value / Future value)
• Easy to calculate compared with the other tools
• It considers all the cash flows from the project
• It gives the ranking according to the NPV value of different projects

Disadvantages of NPV

• It focuses on the short-term projects
• Few costs can’t be estimated when calculating NPV
• Not possible to compare different sizes of projects
• Difficulty in determining  the required rate of return

Explain Payback Period Technique For Evaluation Of Capital Expenditure Proposal.

The payback Period (PBP) is calculated with the help of cash flows and cumulative cash flows. The project returns the investment in a short period that the project is accepted if the time period is longer than reject the project. 

What are IRR and ARR?

Internal rate of return and Accounting rate of return is also the techniques used for evaluating and analyzing the investment decision.

The internal rate of return is the discount rate or discount factor that makes the net present value of a project zero. In simple words, it is the expected compound annual rate of return that will be earned on a project or investment. 

The accounting rate of return (ARR) is a formula that indicates the percentage rate of return expected on an investment or project compared to the initial investment’s value. The ARR formula divides an asset’s average revenue by the company’s initial investment to derive the ratio or return that one may expect over the lifetime of an asset or project. The major drawback of ARR is not considering the time value of money or cash flows, which can be an integral part of maintaining a business’s operational activity.

What are zero coupon bonds?

The recruiter/interviewer will check the conceptual background for the role.

Zero coupon bonds are bonds in which the face value or par value is repaid at the time of maturity of the bond, but the investor will purchase this bond at a discounted price. It does not make periodic interest payments, or they do not pay interest during the life of the bonds, hence the term zero coupon bond. When the bond reaches maturity, its investor receives its par value only.

What are Deep Discount Bonds?

In deep discounted bonds, when the bond matures, the company will redeem the investor the full face value of the bond. A bond can be sold at par, at a premium, or at a discount. A bond purchased at par has the same value as the face value of the bond. A bond purchased at a premium has a value higher than the bond’s par value. Over time, the value of the bond decreases until it equals the par value at maturity. A bond issued at a discount price below par value is known as a deep-discount bond.

Explain how you would value a company.

There are many ways of valuing a company, majorly 3 ways

1. Asset valuation- A company’s assets include tangible and intangible assets. Use the book or market value of those assets to determine the business’s worth. Sum of all the fixed and current assets and customer relationships as you calculate the asset valuation of the business.
2. Earnings valuation- Earnings of the company determine its current value. If the business struggles to bring in enough income to repay the expenses or owes its value drops. Conversely, repaying debt quickly and maintaining a positive cash flow improves your business’s value. Use all of these factors as you determine the business’s earnings valuation.
3. Discount cash flow valuation- If the profits are not expected to remain stable in the future, use the discount cash flow valuation method. It takes your business’s future net cash flows and discounts them to present-day values. With those figures, you know the discounted cash flow valuation of the business and how much money the business assets are expected to make in the future.
4. Can you describe your process for evaluating a company’s value?

Process of evaluation of company’s value

• Planning and preparation: for any business or any activity, planning, and organizing are the first steps because without proper planning cannot go blindly to any activity once the planning is done, and they need to prepare or organize the things.
• Adjusting the company’s financial statements: For the valuation of companies, they require the financial statements of the organization with that data applying the techniques, so they need to adjust the financial statements.
• Choosing the business valuation methods: next is to what are the available valuation methods in which method is suitable for the organization according to the size of the organization.
• Applying the selected valuation methods: which is suitable for the organization that we need to apply to the data to find the business values. 
• Reaching the business value conclusion: once we get the business value, we need to analyze and conclude the organization’s business value.

What is the difference between debt and equity?

• Debt is the company’s liability, which must be paid off after a specific period. Money raised by the company by issuing Equity shares to the public or investors, which can be used for a long period, is known as Equity.
• Debt holders are outsiders, and equity holders are the company’s real owners.
• Debt is the borrowed fund, while Equity is the owned fund.
• Debt reflects money owed by the company towards another person or other financial institution, and Equity reflects the capital owned by the company.
• Debt can be kept for a limited or predetermined, or fixed duration period and should be repaid back after the expiry of that term. On the other hand, Equity can be kept for a long period.
• Debt holders are the creditors, whereas equity holders are the owners of the company.
• Debt carries low risk as compared to Equity, and when it comes to returning, it’s vice versa.
• Debt can be in the form of term loans, debentures, and any other loans, but Equity can be in the form of shares and stock only.
• Return on debt is known as interest. In contrast, the return on equity is called a dividend.
• Return on debt is fixed and regular, but it is just the opposite in the case of return on equity.
• Debt can be secured or unsecured, whereas equity is always unsecured.

What are the different types of derivatives?

A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset (like underlying assets) or set of assets. Common underlying instruments include bonds, commodities, currencies, interest rates, market indexes, and securities.

The four major types of derivatives are:

• Options
• Forwards
• Futures, and 
• Swaps. 

When should a company buy back stock?

Companies buy back their own stock mainly to create value for their shareholders. In this case, value means a rising share price or paying the premium value for the share.

Reasons for buyback of stock

• Excess of cash flow with the company
• From a tax perspective also, some companies will buy back shares from the shareholders.
• Buyback of shares tends to improve the value of the companies
• Companies having signs that the stock is undervalued
• Redemption of shares.

Cost of debt or equity higher?

The cost of equity is always higher than the cost of debt for so many numbers of reasons. One of the biggest factors to consider when focusing on debt and equity is that the cost of borrowing with debt is tax-deductible because of its expenses for the company. Equity is also more expensive because equity investors don’t always receive fixed dividends like a borrower. Additionally, as per the Companies Act, in a firm’s financial structure, debt receives a higher priority than equity in the case of bankruptcy or winding up of a firm. Because of this, lenders will get their money first, with less risk associated with debt.

What is monetary policy?

A monetary policy is a governmental policy that controls the supply of money to the country. Monetary policy plays a large role in the economy’s availability or flow of money. The government’s monetary policy also affects the rupee value and the rate of interest on it. When deciding what monetary policy to implementing, governments typically work toward goals of stability and economic growth.

What is Underwriting, and what is its role?

Underwriting is a guarantee given by the underwriter that in the event of under subscription, the amount underwritten would be subscribed by him. It is insurance to the company which proposes to make a public offer against the risk of under subscription.

Roles of underwriting:

• The underwriter’s primary role is to purchase unsold securities from the company and resell them to the public.
• The underwriters take the risk that they will be able to resell the securities to the public.
• Dissolution of the issue
• Risk diversification/risk minimization
• More research on market conditions and volatility of securities price.
• Act as a form of insurance for the company.

What are some key differences between commercial and investment banking?

Investment Bank

An Investment bank is a financial institution that assists individuals, corporations, and governments in raising finance by underwriting and acts as the client’s agent in the issuance of securities or both. An investment bank may also assist companies involved in mergers and acquisitions and provide ancillary services such as trading of derivatives and equity securities & FICC ( Fixed Income Clearing Corporation) services.

Major roles of investment banks are IPOs, investment management, Mergers & acquisition, and other services.

Higher risk is involved in investment bankers.

Commercial Bank

The term commercial bank refers to a financial institution that accepts deposits and lends money to the public, offers account services, makes various loans, and offers basic financial products like debit cards, credit cards, locker facilities, and savings accounts to individuals and small businesses.

Major functions of commercial banks are debit & credit card facilities, locker facilities, loans, and other functions.

Less risk is involved in investment bankers.

Can you tell what a convertible bond is?

Convertible bonds refer to after a specific maturity period, and the bondholder has the option of converting the bonds into common stock.

In other words,  A convertible bond or convertible debt is a type of bond that the holder can convert into a specified number of shares of common stock in the issuing company or cash of equal value. It is a hybrid security with debt- and equity-like features.

What is the formula for calculating working capital?

Working capital refers to the difference between the organization’s current assets and current liabilities. It is very important for all organizations to meet their daily expenses.

The formula for calculation of working capital is Current assets minus current liabilities or Short term assets minus short-term liabilities.

Current assets are Inventory, debtors, bills receivables, tradable securities, prepaid expenses, cash, and bank balance.

Current liabilities are Short term debts, creditors, bills payable, bank overdrafts, and outstanding expenses.

Explain Profitability Index (pi) /benefit Cost Ratio (b/c Ratio)?

The benefit-cost ratio (BCR) is a profitability indicator used in cost-benefit analysis to determine the viability of cash flows generated from a project. 

The Benefit Cost Ratio compares the present value of all benefits/cash flows generated from a project to the present value of all costs.

The formula for Benefit cost ratio is the Present value of benefit expected from the project / Present value of the cost of the project.

What Are The Advantages And Limitations Of Credit Rating?

Credit rating refers to a measurable assessment of a borrower’s or company’s creditworthiness or credit repayment capability in general terms or with respect to a particular debt, securities, or financial obligation. A credit rating can be assigned to any entity that seeks to borrow money: an individual, a corporation, a state or provisional authority, or from the government.

Advantages of Credit Rating 

• Helps in investment decisions for investors or for the public
• Easy to raise funds with the symbols of credit rating symbols
• It is the assurance of the safety of the investor’s fund
• Choice of securities/instruments according to the credit rating signs/symbols
• Rating builds the company securities value or market value of the security.
• Recognition of new companies  

Disadvantages of Credit Rating 

• Biased rating and misrepresentation
• Reflection of temporary or short-term financial condition
• The current rate may change down the line
• Differences in rating different agencies
• The problem for new companies selling their securities
• Issuer and rating agencies relationship.

Listed vs. unlisted company

Listed company:

• A listed company is one that is registered on various recognized stock exchanges within or outside the country, and its shares are freely traded on the stock exchanges.
• It has to follow guidelines given by SEBI
• Owned by many shareholders
• Highly liquid securities
• Volatility is very high
• Stock prices are easily available, which depends on the demand and supply forces. Hence, the market value can be easily gathered.

Unlisted company:

• An unlisted company refers to a company that is not listed on the recognized stock exchange, and its shares are not freely traded on the exchange.
• It has to follow guidelines given by Central Government 
• Owned by private investors
• Not liquid securities
• Volatility is low
• Determination of market value is a bit difficult. And the estimated or forecasted market value can be calculated.

What Are The Eligibility Criteria For A Listed Company To Make a Public Issue?

A listed company is a public company. It has issued shares of its stock through an exchange, with each share representing a sliver of ownership of the company. 

Those shares can then be bought and sold by investors, rising or falling in value according to demand. A company must apply to an exchange to be listed.

Eligibility criteria for a listed company to make a public issue are given below:

1. Paid up Capital

The paid-up equity capital of the applicant shall not be less than 10 crores, and the capitalization of the applicant’s equity shall not be less than 25 crores. For this purpose, the post-issue paid-up equity capital for which the listing is sought shall be taken into account.

2. Conditions Precedent to Listing

The Issuer shall have adhered to conditions precedent to listing as emerging from inter-alia from Securities Contracts (Regulations) Act 1956, Companies Act 1956/2013, Securities and Exchange Board of India Act 1992, any rules and/or regulations framed under foregoing statutes, as also any circular, clarifications, guidelines issued by the appropriate authority under foregoing statutes.

3. At Least three years track record of either

The applicant seeking listing; or The promoters/promoting company, incorporated in or outside India or Partnership firm and subsequently converted into a Company (not in existence as a Company for three years) and approaches the Exchange for listing. The Company subsequently formed would be considered for listing only on fulfillment of conditions stipulated by SEBI in this regard.

4. The applicant desirous of listing its securities should satisfy the exchange on the following:

• Redressal Mechanism of Investor grievance
• Defaults in payment

What is money laundering?

Money laundering is a process that criminals use in an attempt to hide the illegal source of their income. By passing money through complex transfers and transactions or through a series of businesses, the money is “cleaned” of its illegitimate origin and made to show as legitimate/ethical business revenues/ incomes.

These are the three stages involved in money laundering: 

• Placement
• Layering, and
•  Integration

Conclusion

The capital market is a very important part of the economy. It is essential to function properly to ensure that businesses can raise the capital they need to invest and grow. The interviewee will have a lot of experience in the capital market and is able to provide a lot of insights into how it works. Hence, it is important to make the most of the interview process by gathering the knowledge they possess as much as possible.

Frequently Asked Questions

1. What are the questions asked in the capital market interview?

You will be asked basic questions to start with, like what does capital market mean, its significant elements, and the limitations of capital budgeting, before proceeding to the advanced questions.

2. What are the basics of the capital market?

It is possible to buy and sell assets backed by long-term debt or equity in a capital market. Capital markets direct individuals’ assets to organisations or governments that can invest in them long-term.

3. What are the 3 capital markets?

The three popular Capital Markets are:

1. The Stock Market
2. The Bond Market
3. The Currency & Foreign Exchange Market

4. What is the role of capital markets?

Capital markets allow companies to raise money for expansion by allowing traders to purchase and sell stocks and bonds. Since they have trustworthy markets where they can receive money, businesses also have less risk and expenditure when acquiring financial resources.

5. How do capital markets work?

Funds markets operate by bringing together buyers of debt or securities with investors willing to assume risk and direct their funds to various uses. Brokerage firms are frequently used and offer to handle the trades in exchange for a small fee.

6. What is an example of a capital market?

There are many popular capital markets all over the world. New York Stock Exchange, London Stock Exchange, NASDAQ, and more, to name a few.

7. What are the two types of capital markets?

There are two main types of capital markets—primary and secondary. 

Primary Capital Market: Here, organisations, including businesses, governments, and institutions serving the public interest, raise money by issuing bonds. Companies that raise funds by selling new stocks through initial public offerings make up the primary capital markets (IPO).

Secondary Capital Market: Customers can buy and sell financial and investment products, including stocks, shares, and bonds, on the secondary capital market. The trading and exchanging of current or previously issued securities is the primary characteristic of a secondary capital market.

8. What are the instruments of the capital market?

Instruments in Capital Market can be broadly divided into two types: Equity Security and Debt Security. Equity security further includes equity and preference shares, and debt security includes bonds and debentures.

9. What are the benefits of the capital market?

There are many benefits of the Capital Market, some of which are:

• The capital market facilitates the movement of funds among several investors, including those who lend and those who supply capital.
• Secondary capital markets also support liquidity development.
• Bonds and other financial instruments traded on the stock market offer investors higher interest rates than shares and banks.
• The liquidity of the instruments on the capital market allows for simple conversion into cash.