Top 7 Fixed Income Interview Questions

The trading floors of major sell-side investment banks are laid out into distinct divisions. These divisions are then broken down into desks and these desks are often dedicated to one "product" or asset class.

For example, Goldman Sachs has two broad divisions within sales and trading: FICC (fixed income, commodities, and currencies) and equities.

The number of desks that make up fixed income is almost always much larger than any other division. This is because fixed income is a hugely broad term that will encompass any kind of fixed income instrument (a bond or loan) issued by either governments or by corporates. 

For example, within the fixed income division of any trading floor here are just some of the desks you may find:

• Treasury (government bond) trading
• Swaps trading
• Inflation trading (TIPS, in the United States)
• MBS (mortgage backed securities) trading
• High yield trading
• Distressed debt trading
• Bank loan / CLO trading
• Investment grade credit trading
• Cross asset trading (a broad group that deals across those listed above)

Fixed income is a great part of the trading floor to begin your career at because it has been most impervious to changes in automation compared to other areas (like cash equities).

Fixed income sales and trading is also the heart of any trading floor and the division usually makes up the majority of revenue that the trading floor brings in. In fact, over the past year we've seen across nearly all major investment banks a resurgence in fixed income revenues (often to near record levels).

As I've said many times, it's critically important that you figure out prior to your sales and trading interviews what desks you'd like to be on. In an interview, you shouldn't ever say you're just broadly interested in fixed income as that encompasses an incredibly diverse set of desks where the nature of the work will be wildly different. 

With that said, let's cover some of the most common fixed income interview questions. These questions will touch on most of desks above to give you a feel for the diversity of interview questions that could come your way.

Fixed Income Interview Questions

Below are seven fixed income interview questions you'd likely get when interviewing for a S&T role at a place like JP Morgan, Morgan Stanley, RBC, Barclays, etc. These are particularly apt to come up as sales and trading interview questions if you express an interest in fixed income (as opposed to equities, commodities, or FX).

1. What about fixed income interests you?
2. What desk within fixed income are you most interested in?
3. What are benchmark treasuries?
4. What's the primary distinction between a future and a forward?
5. What does a steepening yield curve in the front end tell us?
6. What's one common distinction between a loan and a bond?
7. What separates investment grade from high yield debt?

What about fixed income interests you? 

For some summer analyst sales and trading roles - like at Goldman - you'll be able to rotate across divisions. For example, I rotated on two fixed income desks and one in equities (in equity derivatives). For other summer analyst programs you'll be applying to a specific division, but will not need to lock-in exactly what desk you want to be on in the interview.

All this is to say that you can expect to be asked what division of the trading floor most interests you, and if you say fixed income you should have a rationale as to why.

The rationale that I would speak to is that within fixed income you have the ability to deal with slightly less common securities that (for the most part) can't be traded by retail investors or are not actively traded by retail investors (e.g. any kind of corporate credit instrument or credit derivative).

Fixed income also is defined by having a fundamentally different economic structure than equities, commodities, or FX. As the name implies, you have some base principal amount that guarantees some claim of (usually) predictable future cash flows.

It's difficult to speak too much about your interest in fixed income beyond these two because of the diversity of desks. For example, saying you liked how illiquid fixed income is can be true (if you're talking about certain credit desks) but is not at all true when talking about areas of rates trading like treasuries (that are the most liquid market in the world). 

What desk within fixed income are you most interested in?

Here you need to begin to narrow down your areas of interest. As I've mentioned many times before the most important thing to do here is be consistent.

Saying you're interested in both treasury (government bond) trading along with high yield trading is a bit of a head scratcher. While both are technically within the fixed income division, you're dealing with two wildly different kinds of desks. 

What you need to do is decide what attributes of a desk you think you'd like. Remember, no one is going to hold you to what you say in an interview. You aren't committing yourself to anything, so just give your honest appraisal as of now.

The kinds of decisions you need to make are:

• Would you like to be on a flow desk (meaning a desk that is doing hundreds of trades a day)
• Would you like to be on a desk with wide spreads that is illiquid (this is similar to the point above; with wider spreads comes more risk bearing in every single trade)
• Do you want to deal with a smaller set of securities within your desk (for example, trading one part of the yield curve in rates means you're dealing almost exclusively with a few kinds of bonds; in high yield trading you'll be covering many different individual corporate issuers all of whom are different)
• Do you like thinking about more macro themes (macro themes are most relevant for rates trading, but for credit trading you often will be thinking about industry themes and the dynamics of single issuers and how they're preforming)

Ultimately, everyone has different interests and this is part of the reason why I stress taking the time to study what individual desks do and figure out what kind of products most interest you. 

For reference, if you're interested in flow trading with a small set of securities and thinking about macro themes you should speak to being interested in treasury, TIPS, and MBS sales or trading. If not, then you should speak to areas of corporate credit like investment grade, high yield, CLOs, and distressed.

What are benchmark treasuries? 

You'll often hear a treasury or government bond referred to as being a benchmark or being "off the run". All benchmark refers to is the fact that the five-year bond (for example) is the most recently issued. An off-the-run five-year would simply denote a five-year bond that is not the most recently issued.

Obviously in order for the government to finance their debts they don't issue one large five-year bond of hundreds of billions and then wait around five years in order to issue another one. Instead there are dozens of five-year treasuries at any on time. One of these will be the benchmark, and all the rest will be off-the-run (some with just a few months until maturity, others with almost five-years until maturity). 

What's the primary distinction between a future and a forward?

Futures and forwards are both ways (as the names imply!) to place a bet on the future outcome of some type of security.

Futures are centrally cleared (via CME) with standardized language in the underlying contracts. Forwards are bespoke contracts between two counter-parties.

Futures are often used as a way for a market-maker to hedge their underlying exposure (by either selling futures or buying futures) in order to reduce down their underlying risk in their book.

Futures in the treasuries market, for example, are an incredibly liquid market and at many times will be more liquid than the cash market. 

Forwards are engaged in when a client wants specific exposures outside of what is in the standardized contracts of futures.

What does a steepening yield curve in the front end tell us?

If the yield curve is quite steep in the front end, that likely signals that the market is anticipating future rate increases from the Fed.

It's important to note that just because a yield curve is steep in the front end that does not necessarily mean that the Fed has set the overnight rate near zero. Hypothetically, the overnight rate could be much higher and so long as the 2yr is higher than that amount you'd still say the curve is steep and is signalling an increase in rates is likely.

A way to verify this is by looking at Fed Funds futures, which show what the market is pricing in the Fed doing moving forward.

What's one common distinction between a loan and a bond?

The quickest way is often to look at whether they have fixed or floating interest rates tied to them. By this I mean that term loans and revolvers are spread off of a floating rate (in the past this was LIBOR, but now everything is transitioning to SOFR).

So, for example, you'll see loans have rates like L + 250 or L + 350. This means that you take LIBOR and then add 250 or 350 basis points (2.5% or 3.5%) to get to the actual coupon payment you'll receive.

For bonds, they will almost exclusively have a fixed coupon payment of say 4.5%. 

The reason why loans - the more senior part of the capital structure - want to have floating rates is that in the event of rising rates (which will raise LIBOR levels) they want to capture that upside (as opposed to now having a below market interest rate on their debt). 

Often term loans will have LIBOR floors of 1%. This way even if LIBOR is below 1%, at a minimum the term loan lender will receive 1% plus the spread (in our prior example 250 or 350 basis points). 

What separates investment grade from high yield debt?

This can be a bit of a trick question. While the answer is very simple, often interviewees will ramble on and give other reasons that are not strictly true.

So the only distinction between IG and HY debt is their credit rating. That's it. If debt is rated below Baa / BBB then it is high yield.

Now it's true, of course, that lower rated HY debt tends to have higher yields (which is the answer most give) but you can absolutely have BBB rated IG debt that has higher yields than BB rated HY debt.

When it comes to classification of either being IG or HY, the only distinction is in the underlying credit rating of the debt. 

Note: Within high yield debt you have distressed debt, and a common way to classify what high yield debt is actually distressed is if it trades at a yield of 1000 basis points (10%) over the underlying treasury of the same maturity.

Conclusion

Well there you have it. Fixed income is almost invariably the largest division within any trading floor and that's largely because of the wide array of desks that make up fixed income sales and trading.

As I previously mentioned, over the past year we've seen a large increase in fixed income revenue at the major banks. It's a great place to end up -- especially if you don't have a particular interest in areas like FX, equities, or commodities. 

Whenever people ask me about an area of sales and trading they should think about joining - because they have no underlying preference - I always point them to areas of fixed income because I believe it will be a resilient area of the trading floor for decades to come. It's an essential business - unable to be done by FinTech companies - and mostly unable to be automated away.

One thing to keep in mind is that you should have an idea of what specific desks within fixed income are really of most interest to you. That's part of the reason why nearly all the desk guides in the Sales and Trading Prep Course surround desks within the fixed income universe.

Good luck in your interviews!