Fundamentals

Question 1

What are the main things investment bankers do?

Answer 1

Valuation, LBO, IPO, M&A.

Question 2

What are the main methods of valuation?

Answer 2

Comparable companies,
Discounted cash flow
& precedent transactions.

Question 3

What is valuation?

Answer 3

Valuation is the method of obtaining the value of a company or assets worth. Valuation is part science and part experience/art.
Valuation involves two main approaches; market approach such as comparable companies & Precedent Transactions, this measures the value relative to others and prior success. The income approach such as DCF is a measure of the intrinsic value.

Question 4

What sort of services does an investment bank provide?

Answer 4

Equity and debt issuance, ECM and DCM, advisory, trading and brokerage and asset management.

Question 5

What is the role of the Chinese Walls in investment banking?

Answer 5

To remove conflicts of interest, asset managements and trading conflicts with the equity and debt issuance side.

Question 6

What is the difference between a merger and an acquisition?

Answer 6

merger: A + B -> C, two firms combine to a new one.
acquisition: A + B -> A, a larger firm buys a smaller firm and combines it with its existing business.

Question 7

what is the difference between Horizontal Mergers and Vertical mergers and conglomerates?

Answer 7

A company consumes another company in the same industry to achieve economy of scale - anti-trust introduced from this.
Vertical a company buys another company related to but not identical to its existing business. A conglomerate is a business that buys multiple businesses in unrelated fields.

Question 8

Three most important IPOs in History.

Answer 8

Ford - 40% to 5%, bankers have a strong relationship with Ford, relationship banking.
Alibaba - $25 bn largest IPO. 6 banks responsible for the IPO
Saudi Aramco - largest IPO in history, 1.87 trillion.

Question 9

What are capital markets?

Answer 9

This is important when you want to raise equity - going public - ECM or issue debt - DCM - sell its debt.

Question 10

What is a seasoned equity offering?

Answer 10

This is the case when you want to issue more shares.

Question 11

What is a debt capital market?

Answer 11

This is the issuing of a bond to investors, it mirrors the equity offering process. Governments can also borrow money from public investors. bonds are typically easier to price due to the credit rating system.

Question 12

What are syndicated loans?

Question 13

What are the methods of consideration used in M&A?

Answer 13

stocks, cash or a mix of the two.

Question 14

What does a banker do within an M&A?

Answer 14

Advisory: valuable information, find targets, communication and due diligence. buy or sell side. Sell side is more likely to complete the deal, commissions are more likely. Buy side there is a retainer and then a success fee.

Question 15

Sell side core tasks include:

Answer 15

find bidders, prepare seller for the sales process, business valuation, min price, co-ordinate sales, while with advisor and bidders.

Question 16

Buy side core tasks include:

Answer 16

provide strategic advice, value the target, synergise estimates.

Question 17

What is an investment bankers role in restructuring?

Answer 17

Offer

Question 18

What is the role of the trading and brokerage arms of investment banks?

Answer 18

This includes: proprietary trading with the banks assets - trading and making money on connecting sellers with buyers and small money on the spread - brokerage. Brokerage is becoming less important due to the existence of no fees/low fees brokerages. This arms also deal with illiquid securities trading these prevent a high risk due to low volume and high volatility.

Question 19

What is the purpose of the asset manager arm?

Answer 19

Handle the money of institutions, pensions, mutual funds, high net worth individuals and companies. Give advice, diversify, provide a number of options. Match a returns benchmark, ensure that the risk return profile for the client is meet. They action, implement and monitor client investments. The roles involved are: sales, portfolio managers and R&D.

Question 19

What types of assets and derivates do traders work with?

Answer 19

Fixed income, Equities, derivatives: options, futures, forwards and swaps, commodities and forex. Derivatives can be used to hedge bets or speculate.

Question 20

What are the main types of investment bank and what do they do?

Answer 20

Global - all investment arms
financial market services - brokerage and trading.
wholesale - loans, leaning and government work.
bountique - often M&A focus, advisor services, consulting.

Question 21

What is the difference between transaction and relationship banking?

Answer 21

Transaction banking is about reaching as many clients as possible with quick and repeatable solutions. This has a lower margin but is standardised and easier to implement for more clients - generally preferred by larger banks. Relationship banking is about a custom tailor made experience for the client and working with the client for long periods of time. This is more risky, more time consuming and requires lots of effort. The upside is a premium and guaranteed work for longer.