Theory

Swap• A Swap is simply an agreement between two parties to exchange payments over some period of

time

Interest rate Swap

pay floating/Receive fixed Pay fixed/receive floating

Two counter parties agree to exchange int. pmts. Based upon a notional amount of principal

Inverse FloatersA bond or other type of debt whose coupon rate has an inverse relationship to a benchmark rate. An inverse floater adjusts its coupon payment as the interest rate changes. When the interest rate goes up the coupon payment rate will go down because the interest rate is deducted from the coupon payment.Structured notes and CMOsIs a debt security with one or more special features, such as making payments based on an underlying index. For instance, a structured note is a bond which, instead of paying the typical interest payments, will use an index, such as the S&P 500, to determine the amount of the interest payment. 

List the criteria considered important in choosing an investment bankIndustry Experience

Size of Transaction

Team

Fee Structure

Explain the key differences between a private placement and a public offeringIn a private placement, you sell equity shares of your business to a select group of investors.

The most common type of public offering is an initial public offering, in which equity shares are offered to public investors for the first time

Differentiate between a pure commercial bank and a pure investment bankCommercial bank provide other various facilities such as deposit , atm . internet banking

It provide loan which is considered as an asset in their balance sheet

Investment bank acts as an intermediary and invest the money of its investors to assure the gain on it

Identify the major differences between the forward contracts and the futures contracts

A futures contract is a standardized contract that is traded on an exchange and is’ marked to market’ daily, but where physical delivery of the underlying asset usually does not occur.

Under a forward contract, one party agrees to buy a commodity at a specified price and a specific future date and the other party agrees to make the sale. Delivery does occur.

State the industries which are most sensitive to the business cyclesCyclical industries include those that produce durable goods such as raw materials and heavy equipment. What does an inverted yield curve suggest about an economyAn interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession.

Explain the concept of earnings quality

The degree to which earnings are attributed to aspects of the company's business, as opposed to external forces. If a company has a change in earnings derived from a decrease in production costs or an increase in sales, they are said to have a high quality of earnings. If a company's earnings are attributed to outside sources such as inflation, this is seen as low quality of earnings.

Why is common stock referred to as a residual claimant securityIn the event’s of a firm’s liquidation, common stockholders cannot be paid until claims of employees, the government, short-term creditors, bondholders, and preferred stockholders are satisfied. After these prior claims are paid, the stockholders are entitled to what is left over, the residual.

Why is the call provision on a bond generally an advantage to the bondissuerthat grants the issuer the right to buy back all or part of an issue prior to the maturity date. Typically, call options on bonds will be exercised by the issuer when interest rates have fallen. A bond call will almost always favor the issuer over the investor.

What is meant by convexity? Why should bond investors consider it?In the bond world, convexity refers to the shape of the yield curve and  how sensitive bond prices are to changes in interest rates.

convexity helps investors anticipate whatwill happen to the price of a particular bond if market interest rates change.