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<!DOCTYPE html>
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<title>Interview questions - Finance</title>
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<body class="container">
<h1>Finance interview questions</h1>
<my-quiz>
<my-pair>
<my-question>Define a European call option and explain its characteristics.
<pre>
Option Details:
- Strike Price: $50
- Expiration: 3 months
- Current Stock Price: $45</pre>
</my-question>
<my-answer>A European call option gives the holder the right, but not the obligation, to buy an underlying
asset at a predetermined strike price on the expiration date. Unlike American options, European options
can only be exercised at expiration. Profit potential is unlimited, while the maximum loss is limited to
the option premium paid.</my-answer>
</my-pair>
<my-pair>
<my-question>What is put-call parity in options pricing?
<pre>
C + PV(K) = P + S
Where:
C = Call Price
P = Put Price
S = Current Stock Price
K = Strike Price
PV(K) = Present Value of Strike Price</pre>
</my-question>
<my-answer>Put-call parity is a fundamental principle in options pricing that establishes a relationship
between the prices of European put and call options with the same strike price and expiration. It
demonstrates that a portfolio of a call and risk-free bond is equivalent to a portfolio of a put and the
underlying stock, preventing arbitrage opportunities.</my-answer>
</my-pair>
<my-pair>
<my-question>Explain Black-Scholes options pricing model assumptions.
<pre>
Key Assumptions:
- Log-normal distribution of stock prices
- No transaction costs
- Risk-free interest rate is constant</pre>
</my-question>
<my-answer>The Black-Scholes model assumes: 1) Stock prices follow a geometric Brownian motion, 2) No
transaction costs or taxes, 3) Risk-free rate and volatility are constant, 4) No dividends during the
option's life, 5) Options are European-style, 6) Markets are efficient and frictionless. These
simplifying assumptions help create a mathematical framework for options valuation.</my-answer>
</my-pair>
<my-pair>
<my-question>Define a zero-coupon bond and its key characteristics.
<pre>
Bond Parameters:
- Face Value: $1,000
- Maturity: 5 years
- Yield to Maturity: 6%</pre>
</my-question>
<my-answer>A zero-coupon bond does not pay periodic interest (coupons). Instead, it is sold at a discount to
face value and redeemed at full face value at maturity. The difference between purchase price and face
value represents the investor's return. These bonds are sensitive to interest rate changes and have
higher price volatility compared to coupon-bearing bonds.</my-answer>
</my-pair>
<my-pair>
<my-question>Explain bond duration and its significance.
<pre>
Bond Characteristics:
- Coupon Rate: 5%
- Maturity: 10 years
- Current Yield: 4.5%</pre>
</my-question>
<my-answer>Duration measures a bond's price sensitivity to interest rate changes. It represents the weighted
average time to receive cash flows and indicates how much a bond's price will change for a 1% change in
interest rates. Longer duration implies higher interest rate risk. It's a critical metric for bond
portfolio management and risk assessment.</my-answer>
</my-pair>
<my-pair>
<my-question>What are callable bonds and their key features?
<pre>
Callable Bond Parameters:
- Face Value: $1,000
- Coupon Rate: 6%
- Call Date: After 5 years
- Call Price: $1,050</pre>
</my-question>
<my-answer>Callable bonds allow the issuer to redeem the bond before maturity at a predetermined price. This
provides flexibility for issuers to refinance debt if interest rates decline. For investors, callable
bonds typically offer higher coupon rates to compensate for the call risk, which limits potential price
appreciation.</my-answer>
</my-pair>
<my-pair>
<my-question>Describe the Black-Scholes delta and its importance.
<pre>
Option Scenario:
- Stock Price: $100
- Strike Price: $95
- Time to Expiration: 3 months</pre>
</my-question>
<my-answer>Delta measures the rate of change in an option's price relative to changes in the underlying
asset's price. It ranges from 0 to 1 for calls and -1 to 0 for puts. Delta helps traders understand an
option's price sensitivity and is crucial for hedging strategies, indicating the equivalent stock
position for an option.</my-answer>
</my-pair>
<my-pair>
<my-question>What is a convertible bond and how does it work?
<pre>
Convertible Bond Details:
- Face Value: $1,000
- Coupon Rate: 4%
- Conversion Ratio: 25 shares
- Current Stock Price: $35</pre>
</my-question>
<my-answer>A convertible bond is a hybrid security that can be converted into a predetermined number of the
issuer's common stock shares. It provides investors with fixed income and potential equity upside. The
conversion option allows bondholders to benefit from stock price appreciation while receiving regular
interest payments. Conversion is typically profitable when the stock price exceeds the conversion
price.</my-answer>
</my-pair>
<my-pair>
<my-question>Explain implied volatility in options trading.
<pre>
Option Parameters:
- Current Stock Price: $50
- Strike Price: $55
- Time to Expiration: 6 months</pre>
</my-question>
<my-answer>Implied volatility represents the market's forecast of a likely movement in a security's
price. Unlike historical volatility, it is derived from option prices and reflects market sentiment and
expected future price fluctuations. Higher implied volatility indicates greater expected price movements
and higher option premiums.</my-answer>
</my-pair>
<my-pair>
<my-question>What are the key differences between interest rate and coupon rate?
<pre>
Bond Characteristics:
- Face Value: $1,000
- Coupon Rate: 5%
- Market Interest Rate: 4.5%</pre>
</my-question>
<my-answer>Coupon rate is the fixed percentage of face value paid by the bond issuer as interest. Market
interest rate (yield) is the current rate of return based on the bond's market price. When market rates
differ from the coupon rate, bonds trade at premium, par, or discount. This relationship determines bond
pricing and investor returns.</my-answer>
</my-pair>
<my-pair>
<my-question>Describe the mechanics of a convertible bond's conversion feature.
<pre>
Convertible Bond Parameters:
- Face Value: $1,000
- Conversion Ratio: 40 shares
- Conversion Price: $25/share
- Current Stock Price: $30</pre>
</my-question>
<my-answer>The conversion feature allows bondholders to exchange their bond for a predetermined number of
common stock shares. The conversion ratio determines how many shares can be received. Conversion becomes
attractive when the stock price exceeds the conversion price. Investors can choose between holding the
bond for fixed income or converting to potentially benefit from stock appreciation.</my-answer>
</my-pair>
</my-quiz>
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