Credit (Risk) Analyst Interview Preparation Guide

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This is commonly considered EBIT divided by interest expense. This is also referred to as “times interest earned”.

The interest rate at which a depository institution lends funds to another depository institution (short-term), or the interest rate the central bank charges a financial institution to borrow money overnight. The overnight rate is the lowest available interest rate, and as such, it is only available to the most creditworthy institutions.

Quote the current LIBOR rate.

A debt instrument is a paper or electronic obligation that enables the issuing party to raise funds by promising to repay a lender in accordance with terms of a contract. Types of debt instruments include notes, bonds, debentures, certificates, mortgages, leases or other agreements between a lender and a borrower. These instruments provide a way for market participants to easily transfer the ownership of debt obligations from one party to another.

Someone who’s detail oriented, good with numbers, enjoys research and analysis, likes working independently and is good at financial modeling and financial analysis with strong Excel skills.

A preferred stock is a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and the shares usually do not carry voting rights.

Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in that it has the potential to appreciate in price. The details of each preferred stock depend on the issue.

Your interviewers will want to know that you’re familiar with their firm, bank or hedge fund. McKelvie says that if you’re using a recruiter, use him for all he’s worth. He’ll most likely help you to understand the company culture, as well as the products traded, portfolio managed, or loan vehicles offered. But do your own homework, too.

This private, non-profit, non-partisan research organization's main aim is to promote greater understanding of how the economy works. It disseminates economic research among public policymakers, business professionals and the academic community.

Over-the-counter (OTC) is a security traded in some context other than on a formal exchange such as the New York Stock Exchange (NYSE), Toronto Stock Exchange or the NYSE MKT, formerly known as the American Stock Exchange (AMEX). The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments, such as derivatives, which are traded through a dealer network.

If you are forecasting free cash flows to the firm, you normally use the Weighted Average Cost of Capital (WACC) as the discount rate. If you are forecasting free cash flows to equity, you use the cost of equity.

It completely depends on the industry. Some industries can sustain very low debt to capital ratios, typically cyclical industries like commodities, or early stage companies like startups. So these would have 0-20% debt to capital. Other industries like banking and insurance can have up to 90% debt to capital ratios.

A stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.

There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders' meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.

Terminal value is either use an exit multiple or the Gordon Growth (growing perpetuity) method.

Rating agencies are supposed to help provide trust and confidence in financial markets by rating borrowers on their creditworthiness of outstanding debt obligations. They can, however, run into conflicts of interest and cannot be blindly relied on for assessing a borrower’s risk profile.

A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type; commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.

It may sound obvious, but it must be stressed: analytical thinking is vital to one’s success as a credit analyst. Professionals in this field do a lot of evaluating; they study customer records, meet clients in person, and become familiar with their history and habits. Analysts must be able to put all these together and decide if it is productive for the company to extend credit in this case.

The business cycle is the fluctuation in economic activity that an economy experiences over a period of time. A business cycle is basically defined in terms of periods of expansion or recession. During expansions, the economy is growing in real terms (i.e. excluding inflation), as evidenced by increases in indicators like employment, industrial production, sales and personal incomes. During recessions, the economy is contracting, as measured by decreases in the above indicators. Expansion is measured from the trough (or bottom) of the previous business cycle to the peak of the current cycle, while recession is measured from the peak to the trough. In the United States, the National Bureau of Economic Research (NBER) determines the official dates for business cycles.

Capital expenditure, or CapEx, are funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. It is often used to undertake new projects or investments by the firm. This type of outlay is also made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building, to purchasing a piece of equipment, or building a brand new factory.

A recession is a significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP), although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession.

This question is more likely to be thrown at someone with previous experience in the field who is applying for a senior credit risk analyst position, but it still might show up in an interview for an entry-level credit risk analyst position with a bank. A good answer demonstrates you understand the concept, and a better answer likely includes an example. A credit default swap (CDS) is a frequently used method of mitigating risk in fixed-income, debt security instruments such as bonds, and it is one of the most common financial derivatives. A CDS is essentially a type of investment insurance that allows the buyer to mitigate his investment risk by shifting risk to the seller of a CDS in exchange for a fee. The seller of the CDS stands in the position of guaranteeing the debt security in which the buyer has invested.

Other questions likely to be encountered in a credit risk analyst position interview are general questions about your problem-solving abilities, your ability to work as a part of a team and your understanding of basic macroeconomics concepts such as fiscal policies and the prime rate.

A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer.

Review all three financial statements for the past five years and perform a financial analysis. Determine what assets can be used as collateral, how much cash flow there is, and what the trends of the business are. Then look at metrics like debt to capital, debt to EBITDA, and interest coverage. If all of these metrics are within the bank’s parameters it may be possible to lend the money, but will still depend on qualitative factors as well.

In order to be a successful credit analyst, it is important that you are proficient in financial analysis, as well. Your interviewer may ask you if you understand things such as cash-flow and other financial statements, income growth, market shares and much more. You may also be asked if you can correctly calculate debt to income ratios in order to discover a client’s dispensable income. All of this information is necessary for developing a client’s credit portfolio. You can answer with “I am very familiar with using various tools and methods to perform financial analyses. I am capable of determining a client’s credit situation quickly and accurately.”

Credit analysts work hand-in-hand with traders, bank management, risk specialists and/or IT people. So, it’s a given that you’ll need to be a people person, a team player, and a go-getter. For instance, you’ll need to demonstrate how you can effectively deal with the inherent challenges of a trading environment. If you have specific examples of management experience, this is the time to emphasize them.

☛ What’s your quantitative analysis experience?
☛ What financial software have you used in the past?
☛ Which financial ratios do you use more often? Which is the most important and why?
☛ What types of customers have you dealt with in the past?
☛ Can you explain the meaning of Credit Default Swap (CDS)?
☛ What’s different with Basel III?
☛ Do you like working in a team?