Contents Preface... 1 About 7city... 3 Introduction... 11 Navigating the Maze... 11 Section 1: Your Application Your Application... 15 Introduction... 15 What is banking?... 17 What do these divisions do?... 18 Interactions between IBD and markets... 31 What to expect as an Analyst within a bank... 33 What makes a complete Analyst?... 34 Preparing to apply... 37 Preparing for the recruitment process... 37 1. Research the financial services industry... 38 2. Attend recruitment events... 39 3. Build up your CV... 41 4. Decide what kind of role is right for you... 42 5. Writing your CV or application... 43 6. The cover letter/motivational section... 46 7. The first round interview... 48 8. The day of the interview... 49 9. During the interview... 50 Answering behavioural/competency-based questions... 51 The STAR interviewing technique... 52 So what s your biggest weakness?... 53 Menuing... 53 Section 2: Your Interview Your interview... 57 Introduction... 57 Providing colour to your response... 57 Read the financial press... 58 Read the research... 58 Investment banking blogs... 58 Accounting and Financial Analysis Q&A... 61 Introduction... 61 What are the key components of a set of financial statements?... 64 What is meant by financial statement integration?...67 Why do accounts show depreciation and amortisation?... 68 How can D&A numbers be manipulated?... 68 How does impact the financials?... 70 How does depreciation affect the financial statements?... 70 How does an impairment write-down affect the financial statements?... 71 How does the purchase of an asset affect the financial statements?... 71 What is the impact on the accounts of a company entering into a new lease of an asset?... 72 How does a provision affect the financial statements?... 75 What is working capital?... 77 What is net debt and how is it used?... 78 Does net debt capture all of a company s debt?... 79 Why is net debt net?... 81 What does equity on the balance represent?... 82 What is a minority interest?... 83 What is the NOSH?... 84 What is EBIT?... 84 5
What is EBITDA?... 85 How and why would you normalise a metric?... 86 What are pro-forma numbers?... 88 What does LTM mean?... 88 What is EPS and how is it used?... 89 What is the difference between basic and diluted EPS?... 90 What is equity dilution?... 91 What is the treasury method?... 92 Why is the cash flow statement so important?... 93 How do you move from EBIT to operating cash flow?... 94 Why does profit not equate to cash flow?... 96 How would you analyse a cash flow statement in five minutes?... 97 What could a company do if it had excess cash on its balance sheet?... 98 What type of pension schemes do companies have? Why are they sometimes problematic?... 99 What is deferred tax?... 100 Valuation Q&A... 103 Introduction... 103 Why is valuation important?... 104 What are traditional valuation methodologies?... 104 Valuation isn t just about theories and models what else should an Analyst consider when valuing a company?... 106 What is the difference between buy and sell-side M&A?... 106 Which valuation techniques are likely to give the highest valuations?... 107 What is a valuation football field?... 108 What is market capitalisation and how do you calculate it?... 109 What is enterprise value?... 109 Walk me through a discounted cash flow... 110 What is free cash flow to firm?... 118 What is beta?... 119 Why and how would you de-lever a beta?... 120 Walk me through a comparable company valuation... 122 What are the pros and cons of EV vs. Equity multiples?... 123 What are the pros and cons of using the EV/EBITDA multiple?... 124 What drives an EV multiple?... 124 Why would multiples of a company trade at a premium or discount to its peers?... 126 What is a control premium?... 127 What does a merger model do?... 128 What factors can make a deal EPS accretive?... 129 What are the pros and cons of equity and debt as transaction finance?... 130 Who does what on a deal?... 131 How can a company defend itself from a takeover?... 129 What is a company profile?... 133 What is a pitch book?... 133 Statistical and Financial Math Q&A... 135 Introduction... 135 What are the common measures of central tendency and dispersion?... 136 What is standard deviation?... 138 What is a geometric mean?... 139 What is correlation coefficient?... 140 What is the difference between simple and compound interest?... 142 What is discounting?... 145 What is an annuity?... 146 What is a perpetuity?... 146 How is discounting used?... 147 What is net present value?... 147 What is the internal rate of return (IRR)?... 148 Equities Q&A... 149 Introduction... 149 What are the basic characteristics of common stock or ordinary shares?... 150 What is an ADR?... 151 6
Why would a corporation choose to raise finance via an equity issue as opposed to a debt issue?... 152 What are the advantages and disadvantages of being a publicly listed corporation?... 152 What does ex-div mean?... 152 What is the difference between primary and secondary markets?... 153 How can new equity be issued?... 153 What is stabilisation?... 154 What is book-building?... 154 What is underwriting?... 154 What are the key stages in an IPO process?... 156 What is a dual track process?... 159 What is a syndicate?... 159 What is a prospectus?... 159 What is a pilot fishing exercise?... 160 What is a Greenshoe option?... 161 What is a secondary offering?... 162 What are the full advantages and disadvantages of a fully marketed book-built offering?... 162 What is an accelerated book-built offering (ABB) or a placing?... 162 What is a rights issue?... 163 What is TERP?... 163 What is an index?... 165 What aris the difference between a market capitalisation weighted index and an unweighted index?. 165 What is the Dow Jones Industrial Average (DJIA?)... 165 What is the Nasdaq?... 166 What is the S&P 500?... 166 What is the FTSE 100?... 166 Money Markets Q&A... 167 Introduction... 167 What are the money markets?... 168 What is the inter-bank market?... 168 How are inter-bank rates quoted?... 169 What is commercial paper?... 169 What is a certificate of deposit?... 170 Fixed Income Q&A... 171 Introduction... 171 Why would a corporate choose to raise finance via a debt issue as opposed to an equity issue?... 172 What are the two main types of debt finance and what are their key features?... 172 What is a bilateral loan/syndicated loan/club deal?... 173 What are the advantages and disadvantages of loan finance?... 173 What is a term loan?... 174 What is a revolving credit facility?... 175 What is the interest rate on a loan based on?... 176 What is LIBOR?... 177 What is EURIBOR?... 177 What is a covenant?... 177 Who are the main credit rating agencies?... 178 Why are credit ratings more important for bonds than loans?... 178 What is the lowest investment-grade rating?... 179 What is a bond?... 180 What are the key features of a vanilla bond?... 181 What are the advantages and disadvantages of bonds?... 182 What is a floating rate note?... 183 What is an index-linked bond?... 184 What is a callable bond?... 184 What is a putable bond?... 184 What is a convertible bond?... 184 What is a Eurobond?... 185 How would you determine the coupon on a bond?... 185 What is a high yield bond?... 185 What is PIK?... 186 What is the Yield to Maturity (YTM)?... 186 7
What is the difference between a clean and dirty price?... 187 What is duration?... 188 What is a yield curve?... 189 What is an asset backed security?... 190 Derivatives Q&A... 193 Introduction... 193 What is the difference between cash and derivatives securities?... 194 What is the difference between OTC and exchange traded?... 194 What is a future?... 195 How are futures used in practice?... 197 What is basis?... 199 What is the difference between contango and backwardation?... 199 What is a forward contract?... 200 What is a futures contract?... 200 What is a long position on a future?... 200 What is a short position on a future?... 201 How does a future settle?... 201 How can a future be used to hedge?... 202 What is an option?... 203 What are the basic option positions?... 204 What drives the price of an option?... 206 What factors influence the time value of an option?... 207 What is an interest rate swap?... 209 What is a cross currency swap?... 210 What is an equity swap?... 211 What is a credit default swap?... 211 What is a structure product?... 212 What is arbitrage?... 213 Foreign Exchange Q&A... 215 Introduction... 215 How are foreign exchange rates expressed?... 216 What is a cross rate?... 216 What is foreign exchange quoted?... 217 What is a forward forex deal?... 218 How are forward rates quoted?... 218 How are forward exchange rates determined?... 219 What is the Fisher effect?... 221 Asset Management Q&A... 223 Introduction... 223 What is asset management?... 224 What is portfolio construction?... 225 What is the efficient market hypothesis?... 225 What is passive fund management?... 227 What is active fund management?... 227 How can portfolio performance be measured?... 228 What is risk?... 231 What is a risk premium?... 232 What is the difference between systematic and non-systematic risk?... 232 How can risk be measured?... 233 What is the Sharpe ratio?... 234 Section 3: Preparing for Work Preparing for Work... 237 Introduction... 237 Life as an Intern... 239 The Internship... 243 Training... 243 Joining your team... 247 Building confidence... 251 8
Appendix 1: Bloomberg for Analysts... 255 Introduction... 255 Bloomberg skills coverage... 255 The Bloomberg keyboard... 256 Using Launchpad... 257 Exporting data from Bloomberg... 259 Finding a company ticker... 260 The equity screen... 261 Accessing shareholder data (holders)... 262 Getting NOSH via the description (DES) screen... 263 Accessing company filing data... 264 Finding company news (and research) for normalization purposes (corporate actions)... 265 Picking a relevant broker report (company research)... 266 What are the current Analyst recommendations (Analyst recs)?... 267 Getting share price data (graph price)... 268 Annotating Bloomberg share price graphs... 269 Creating a relative share price graph... 270 Importing Bloomberg share price data into Excel... 271 Gettting a Hoover s profile... 272 Accessing the related securities screen... 273 Accessing the issuer description screen... 274 Creating government (international) yield curves... 275 Creating yield curve analysis ( yield curve relative )... 276 Credit profile summary... 277 Creating a Bloomberg beta profile... 278 Accessing the WACC profile... 279 Accessing the new issues monitor... 280 Accessing debt term sheets... 281 Creating debt maturity profiles... 282 Accessing money market rates... 283 Accessing forex rates... 284 Accessing world equity indices... 285 Accessing economic data... 286 Using the Bloomberg MA search functionality... 287 Creating league tables... 288 Bloomberg news codes... 289 Appendix 2: Excel shortcuts... 291 Appendix 3: FactSet... 295 Introduction... 295 FactSet application... 296 How to store a list of comparable companies on FactSet... 297 Research companies in depth... 298 Share price data... 300 Company filings... 301 Download multiple PDF TravelBooks... 302 Exporting data from FactSet... 303 Updating and maintaining custom template models, reports and presentations in Microsoft Excel, Word and PowerPoint... 304 Downloading Ready-made models... 306 Improve efficiency and productivity in everyday tasks... 307 Link Excel charts/tables to PowerPoint or Word... 308 Use ActiveGraph to create easy-to-update, Pitchbook-ready financial graphs using your firm s corporate colors, fonts and standards... 309 Index... 311 9