Prepping for an Rx interview. From the recruiter, this is verbatim, the technical question he sent me that will show up in my interview:
"What is the IRR for Rate of Return for a bond trading at $400, now trading at 50% with a coupon of 10%? (Candidate should calculate compound interest in your head)"
How is this calculated without a maturity? Makes no sense to me. assuming i'd do YTM = (coupon + price appreciation/n)/((face+price)/2)
| +186 | Evercore > Goldman and I don’t think it’s particularly close anymore | 65 | 10h |
| +157 | Article: Why UBS's Asian M&A bankers are thriving and UBS's American M&A bankers are not | 17 | 1d |
| +92 | Santander IB? | 10 | 4d |
| +87 | UBS Offer Day | 30 | 1d |
| +71 | I hate Wells Fargo | 19 | 1d |
| +71 | Think Twice before Recruiting for HOUSTON IB!! | 38 | 43m |
| +52 | No return offer - feeling like a failure is an understatement | 21 | 50m |
| +49 | How cooked am I as an incoming WF IB SA 2027? | 17 | 1d |
| +47 | WF Return offers | 28 | 3d |
| +40 | 2026 Investment Banking Return Offer Climate | 25 | 1d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
There's no way this is verbatim (for a start it's not even consistent/accurate English).
But yeah you need maturity to calculate YTM or vice versa, and it's not clear what's even going on in the question (par value uncertain, possibly 2 distinct current trading prices).
I agree...it makes no sense to me. I tried to clarify the question with the recruiter again and this is what he sent me.
I'm not sure there's anything more you can do here, if you keep pushing it you'll look weird - is this recruiter the one interviewing you?
Bond math guide from restructuringinterviews covers everything pretty well, you'll be fine with actual questions.
Good luck!
You need to know time to maturity - but if you assume 5-year hold period:
You pay $400 for a security that pays $80 per year (10% coupon on $800 face value), thats a 20% IRR.
At maturity in 5 years you’ll receive double your money (face value of the security) - 2x in 5 years is about a 15% IRR.
Add those together and you get a 30-35% IRR, probably closer to 30%.
Thank you. If they give me a maturity, I'll follow this. Why closer to 30% IRR even though you get 35%?
The rule of thumb for 2x money over 5 years is 15%, but that comes from basically equal installments of cash flows over the 5 years. Because this component of the IRR is occurring all at the end of the 5 years (the return of principal), it needs to get discounted back more.
Hence closer to 30 than 35
Probably asking for IRR so you should calculate YTM. Generally, for bond math questions, when they're asking for the return on a bond, it's just YTM. To calculate this, you also need to know the years to maturity, and let's just assume 5 years to maturity here.
For bond math, I've always thought it was more "impressive" to walk through the rationale of YTM by splitting the calculation into 1) return from appreciation and 2) return from coupon payments.
1) Appreciation: You're getting (FV-PV)/PV = 100% appreciation over 5 years. Since it's doubling, you could use rule of 72 and say 14.4% appreciation. compounded)
2) Coupons: Your current yield is Coupon/PV = 20%.
Putting that together, you're looking at around a 34.4% YTM. Looks like the actual YTM is around 31%, so we're not too far.
Thank you! Is there a manual way to calculate the IRR on appreciation instead of rule of 72? Just curious
Dolor dolorum repellendus omnis et. Deserunt enim maiores non libero. Placeat dolorem sit blanditiis nisi.
Ab odio maiores aliquam porro. Exercitationem sed voluptas dolorem quis velit sed ut. Voluptas voluptatem qui quia praesentium temporibus sed doloremque natus. Cum rerum consectetur facilis et id molestiae fugit. Excepturi ad corporis facere id. Consequatur nulla cum dolores ipsa est. Corporis ipsa voluptate voluptas eos dolor recusandae et.
Doloribus quis voluptatum quis sunt qui perspiciatis. Eius quidem porro consequatur ipsum unde molestias. Id ad quia atque veritatis deserunt. Consequatur sed ex ducimus minima repellat rem.
Non suscipit sed facilis eum. Velit et expedita ratione omnis similique unde deleniti. Asperiores est voluptatem ut omnis nesciunt.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...