Interview Question on bonds
I am preparing for an interview in Debt Capital Market. I went on the forums and different websites collecting potential questions.
I found this question:
Say you have two high yield bonds with identical coupons and maturities, one from a supermarket and one from a high tech company. Which one do you buy and why?
Here is how I would tackle this question:
The high tech company will represent a higher risk in terms of paying the coupons and the principal. Regarding the cash flow it generates and the liquidation value of the company.
- More uncertainty regarding the cash flow during the “life” of the company versus the supermarket company (annual sales of the products in the stores).
- Liquidation value difficult to estimate: lots of intangible assets (patterns…) versus the supermarket (stores to sell in case of bankruptcy, products in stock to sell).
But, we can also say that in a “perfect market”, this higher risk must be reflected in a lower bond’s price (when buying it in the secondary market) compared to the supermarket’s bond price.
So, everything will depend on the risk appetite of the investor. If I am a risk-adverse investor, I would choose the supermarket company because there is a higher probability that the company will be able to pay the coupons and pay back the principal. But, if I am more a risk-taker, I may choose the high tech company.
What do you think of this answer.....
Thanks a lot.
I think your answer is spot on. I would like to hear what other people have to say. I worked in DCM over the summer and found this to be very helpful in preparing for my interview if you have not looked at it yet.
http://www.leveragedloan.com/primer/
Good luck, I think you will do fine.
I think that makes sense you may also want to know the call features of both of the bonds as well as look at the liquidity in the secondary. Also if there is any talk of future debt issuance which would lower coverage ratios
You should've asked clarifying questions.
I'd rather buy bonds from Microsoft than Safeway, for example.
Most grocery stores have 0 assets (stores leased and large portion of inventory is perishable)
But your answer was fine. B or B-
Thanks for your inputs for all of you
Hey, I know I'm super late to this thread by a few months but I want to add a point you guys might have missed. The biggest difference (and, personally, the first that should come to mind) is "What collateral is there?" In a generic case, non-tech companies have very few, if any, hard assets and most of their cash flow is I.P.-related. Contrast that to a grocery store chain where (lets assume they own all the operating assets) the store, distribution centers, food delivery trucks, equipment, etc. can be used as collateral. The presence of collateral substantially reduces credit risk in a stark contrast between both industries. A great place to start is to look at the balance sheet to see if they even have assets in place.
I know we are talking about a high-yield scenario but even in this case, you should still assess collateral and where you stand on the capital structure. You guys got the stable cash flow point so I didn't mention that.
Toughest questions to expect from High Yield / Distressed Bond Trading interview... (Originally Posted: 09/13/2013)
I'm looking for a few samples of tough technical or market oriented questions to expect from traders at an interview for a Jr Trading role with a team focused on High Yield and Distressed US Bonds. The firm is hiring for an experienced role, not an internship. Though my finance experience is relevant, it is not on a trading desk so help on trading specific or technical questions to anticipate would be appreciated.
Explain convexity as it relates to term structure of interest rates.
Reg S vs. 144A and fungibility. Some grace period questions etc..
Just remember that it's a much less liquid market. Explorer how you would build positions for clients etc.
It wouldn't do you harm to look into CDS, there's a very interesting sit. in Europe at the moment with Codere, paying its interest after the grace period, causing and Event of Default which technically should trigger the CDS, but it shouldn't if you step out of contract land. So there's going to be a fight.
If you're US side, best to familiarise yourself with Capt 11. Also, market trends, holders etc.
Thanks Oreos, really appreciate the advice. Reading up on Codere as you suggested.
I should have stated in my original post this is a buy side role. So not building positions for clients, but in this case for the firm. But I'd guess your point still holds about the lack of liquidity and difficulty/time needed to build positions...
thx again for your comments
Bond maths question 1 (Originally Posted: 10/30/2014)
I bought a 1Y bond for $100 and it has a coupon of $5. I am told that the yield is now 20%. What is the price of the bond now?
your answer is: 105/(1+.20)^1 = $87.50 providing that you purchased it at par value.
I highly recommend that you invest in a TI 89 Titanium or some other sort of calculator that has financial functions, if you don't already.
n=1 i=20 pv=???>>>>>>>>>>$ 87.50 pmt=5 fv=100
Bond Yield Question, Sandridge (Originally Posted: 05/09/2015)
I'm learning about credit analysis for the first time, and am confused about yield differences. If anyone can answer my question it would be great.
Sandridge Energy has a revolver and four types of senior paper outstanding. Each of the four senior bonds appear to be identical except for maturity and coupon. The first maturity isn't until 2020, and is only for $450M. The next is much larger, of around $1.2M in 2021, followed by others in 2022 and 2023.
Currently the 2020's are trading wider than the 2021's (17.1% vs 14.6%).
If I read the indentures right, all of the notes are senior, unsecured, and not subordinated.
If the 2020s are effectively senior due to the earlier maturities, it seems like they should be paying a considerably lower yield than the 2021's, 2022's, or 2023's.
There could be liquidity differences, but that seems like a pretty substantial miss-pricing. What am I missing?
[IMG]http://i61.tinypic.com/rbwsx4.png[/IMG]
The 2020's are trading at 15.5 yield.
bond duration question (Originally Posted: 12/12/2010)
When interest rates decline, the duration of a 30-year bond selling at a premium ______________
Can you please explain why the answer is increases? Thanks for the help.
is equal to 2120
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