Top 10 Sales and Trading Interview Questions You Need to Know
Sales and trading interviews are some of the toughest to crack in all of finance. The reason being is that there is no division within major investment banks that is more diverse in what they do than sales and trading.
Within any given S&T division you'll have folks who focus on equity derivatives, mortgage backed securities, interest rate swaps, distressed debt, among dozens of other products.
The issue is that in a superday for a summer analyst or full-time role, you'll be interviewing with three members of S&T who could come from any of these areas and obviously they can't help but judge you based on whether you'd be a good fit to their desk.
What this means practically is that interviewees need to have a broad understanding of what occurs on a trading floor. I call this contextual understanding.
...No one expects you in an interview to understand how to think about gamma or how to think about an out-of-court restructuring impacting distressed bonds.
However, having contextual understanding of where those things fit into the broader S&T division and what the basics of the major desks are.
Because of just how little information is out there on sales and trading interviews, I created S&T Interviews containing over 300 sales and trading interview questions and 13-guides (including breakdowns of the major desks).
If you are at all interested in breaking into sales and trading, this is the definitive guide I wish I had when I first interviewed and started as a summer analyst at Goldman.
All sales and trading interviews can be thought of as having questions that fit into five distinct categories:
Questions for Interviewer and Product-Specific Questions are the two most underrated and important types of questions. This is where you make or break your interview.
At the end of every interview you'll have the opportunity to ask your interviewer questions. Asking thoughtful, nuanced ones - of which I give examples that are applicable to any interviewer in the S&T Interviews course - is the single best way to stand out and leave a favorable final impression.
Further, as mentioned above, you'll likely get a few product-specific questions about desks that you've expressed an interest in. That's why I created nine Desk Guides in the course that break down the major desks, in interview Q&A format, to make sure you have the basic understanding you need of everything from municipal bonds to collateralized loan obligations.
With all that said, let's dive in to ten common sales and trading interview questions.
On This Page
Below are some links to help you navigate to each of the questions on this page easily. I've tried to pick a diverse selection here to give you an idea of what kinds of questions to expect and prepare for (along with some, like question two and three, that will almost certainly appear in an interview).
Futures allow market participants to take views on future rate movements in an off-balance sheet capacity. There are six futures:
- TU (2yr)
- FV (5yr)
- TY (10yr)
- TN (10yr, ultra-long)
- US (30yr)
- AUL (30yr, ultra-long)
Treasury futures are used routinely in hedging and are incredibly liquid just like the benchmark treasuries are.
Ultimately, a future obliges the seller to deliver an underlying security (not a future) sometime in the future (so a 10yr future would require a delivery of a 10yr Note).
There will be a basket of 10yr Notes that can be delivered - as obviously new 10yrs are routinely being issued - and the specific 10yr Note delivered will ultimately be what is called the cheapest to deliver (CTD).
Some people try to develop a very personal and unique answer here. I think giving a standard answer, with maybe a bit of your personal touch on it, is far better.
You should not say that you have followed the markets since you were a child or that you love investing on your own. That doesn’t clearly communicate that you know what S&T is (it’s not picking stocks on an app). Were you following global macro trends as a teen? Are you doing interest rate swaps in your spare time? Obviously, the answer is likely no.
Your why S&T should clearly communicate you know what S&T is and that you are equipped to succeed in it.
I think S&T provides a great opportunity for someone who is intellectually curious and has a mix of quantitative and qualitative attributes. To me, it’s an incredible chance to get a front row seat to how a given market – depending on what desk you’re on – operates and to see how clients think about a given market at any given time. I’ve talked to those within S&T at various levels, so I know it’s not all roses, of course. But I still think on a risk-adjusted basis there’s hardly a better job to have out of undergrad than in S&T given my personality and interests.
This is an incredibly common question, but one that you should be very careful in answering.
The reason being is that you want to avoid coming across as being certain that there is one area of the trading floor that is right for you before you have even begun.
What you want to do is have an idea of a broad area you think you would like to be in, while expressing that you could be entirely wrong and find a different area to be a far better fit.
In other words you want to some that you've done your homework, while at the same time showing humility that you won't know what area is truly right for you prior to beginning a rotational program or being placed on a desk.
Obviously it’s hard to really have a grasp on what a desk truly does, what the culture is like, etc. before you begin. However, with that said, I do find credit to be really interesting and I know that [bank] has strong high-yield and distressed debt desks.
I find these areas of credit to be fascinating, because of the more narrow range of clients who deal with it, the illiquidity compared to many other products on the floor, and the potential thing that can rapidly move prices (such as an out-of-court restructuring or actual Chapter 11).
However, like I said, I know that many people come into the sales and trading with an idea of where they want to be and end up realizing another area is an even better fit so I’m open to exploration.
Question 4: Can you give me an example of a markets-based story you've read recently and why you found it interesting?
You should have one or two recent news articles you’ve read; from Bloomberg, WSJ, or the FT that you can speak to.
Generally, it’s a good idea to find one about global macro. For example, around what’s happening or what would affect in rates as these generally tie into broader economic or political themes.
I read an interesting piece from the WSJ about how a Biden election was boosting the long-end of the yield curve in anticipation that we’re going to have less fiscal stimulus and more Fed actions under a Biden administration, which will mean the low end will be stuck at the zero lower bound (despite inflation maybe picking up leading to a steepening of the yield curve).
Goldman Sachs also came out with their 2021 expectations report, which also signaled the likelihood of a steeper yield curve in 2021. Of course, many people have been anticipating steeper yield curves for years now and for the most part it has just got flatter!
I do wonder if the Fed will start engaging in more targeted yield curve control to try to suppress down any steepening if it does begin to happen. That would seem like a logical next step given how their conventional policy tools have largely been taken as far as they can go.
Obviously this will be somewhat desk dependent. For example, if you're dealing with mortgage backed securities, then you'd keep a careful eye on not only rates, but particularly where mortgage rates are. This is due to how prepayments on mortgages affects the valuation of mortgage backed securities.
In general terms, things you should probably keep your eyes on, even if it’s not viewed as being directly relevant to the product you’re involved with, would include things like:
- Changes in 5Y5Y swap rates
- Initial jobless claims
- Non-farm payrolls
- Moves in the VIX
- High yield and IG index trends (as spreads to treasuries)
- Moves in the 10-year yield
- Moves in Fed Funds
- The S&P 500 level (or whatever equity index is most relevent)
Question 6: If we have a bond trading at 90, with a 10% coupon, and it matures next year, then what is the yield to maturity?
To get the YTM for a bond maturing in just one year, then you can use the formula: YTM = (coupons + (face value – current price)) / current price, which gives you: 20/90 or 22.22% (you don’t have to do the mental math to get the exact percent in an interview, as long as you get the formula right).
Note: You should not bring a calculator to your S&T interview. However, you should bring a pen and paper in case you need to work anything out.
For bonds maturing in two years or more, to calculate this in an interview you would have to use the YTM estimation formula, which is:
Getting asked about the structure of more esoteric parts of the trading floor is a great way to discern whether or not an interviewee has taken the time and effort to understand various desks.
Don't worry, no one is expecting you to know everything about how to model out a CLO waterfall (although that's a common test for a summer analyst at the end of their time on the CLO desk).
A CLO will be broken down into several tranches. These tranches will have decreasing levels of priority on the underlying cash flows of the levered loans that make up the CLO (to be discussed later).
The top tranche, which makes up the majority of the notes issued by the CLO, will often be structured to ensure that it gets a AAA rating from credit agencies (thus making investors feel it is safe). The bottom tranche, called “equity”, will have the lowest payment priority and is not rated and viewed as being quite risky.
An important point in the graphic above is that the levered loans that make up the CLO often overcollateralize the issuance. What this means is that in theory, if none of the loans default, then equity should get much more than what they put in!
However, the risk equity runs is that levered loans are risky and some that make up the CLO may end up defaulting. So even though the CLO itself is overcollateralized at issuance, equity and some of the tranches above it may be at risk of not being paid back in full over time.
When we talk about a rates trader’s book being properly positioned and taking advantage of the market, this obviously doesn’t mean that if 2yr bonds are overvalued he or she just won’t have any!
Rates traders have such large books that they will always have millions of dollars’ worth of bonds that they may or may not like in order to facilitate client flow and generally be in the market.
Instead the way that a rates trader positions their book is by taking advantage of changes in the yield curve. For example, there’s nothing you can do about owning a lot of 2s. However, maybe you think that 2s will go down more than 5s. This would create a flattening of the yield curve between those two points in the yield curve.
Curve trades involve taking advantage of the relative changes in one bond compared to another along the yield curve by using treasuries and futures to be relatively overweight or underweight certain areas of the curve.
If you know anything about equity derivatives, you know that the Black-Scholes model is incredibly important and foundational model.
However, showing you know the limitations - or perhaps better put, the erroneous assumptions - of the model is a common interview question (if you express interest in equity derivatives) and will set you far apart if you can answer it.
- Normal distribution
There exists pronounced skew or negative tail in actual returns on shares, meaning that there is a bigger chance of significant losses than is built into the shape of the bell curve.
- Continuous random walk
The model assumes that returns follow a random walk, which is not what is actually observed.
- Dynamic hedging
The model assumes it is possible to delta hedge without transaction costs and without liquidity constraints (which is obviously not true, even liquid markets are costly or have times of limited liquidity!).
- Fixed vol
The model assumes you know the level of vol and that it stays constant over the life of the option.
Question 10: What are some reasons why a corporate client - beyond mere speculation - may want to do a FX trade?
Another way to stand out in interviews is not only to know the products dealt with, but also why clients are coming to the bank to trade. Many naively suspect - especially in areas like FX - that it's all hedge funds engaged in speculation.
The reality is that every desk will have a diversity of clients who often come to the bank in search of practical solutions to their problems. In FX this normally means corporations who have FX exposure - due to running their multi-national business - that they would prefer not to have.
- A client may be able to issue debt cheaply in a certain country with a certain currency, but will want to swap it to a different currency
- A client may want to lock in a certain conversion rate in the forward market (creating certainty against unfavorable potential developments in the market of a certain country)
- A client may be anticipating the need to spend capital – to build a new plant, for example – in a foreign country and wants to lock in an exchange rate to ensure they can more accurately predict the total cost of the project
Entering into the sales and trading interview process can appear daunting. It's true that there are a lot of questions that could be asked, and entirely missing on a few of them could be the difference between getting an offer or not.
However, that's ultimately why we created S&T Interviews. It is possible to get up to speed on sales and trading and not leave any glaring holes in your preparation without getting bogged down in reading dozens of academic books (which is simply impractical and likely to confuse more than help).
There's no doubt: preparing for sales and trading interviews isn't something you can do in thirty minutes. However, the reward of getting your foot in the door is having the opportunity to land an extremely high-paying job, with reasonable (for finance) hours, that involves being intimately connected with the markets.
As always, best of luck in your preparation! Just remember to not get bogged down or discouraged as you go along. Remember that most come into sales and trading interviews incredibly unprepared. So the bar is most certainly not too high to clear with good preparation.