Navigating the Maze

Published by 7city Publishing

4 Chiswell Street, London, EC1Y 4UP

www.7city.com

Edited by David Mignano and Caroline Herbert

First edition

Copyright © 7city Learning Limited 2013

All rights reserved. No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording or otherwise) without the prior permission of the copyright owner. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages.

While every effort has been made to ensure its accuracy, 7city Learning Limited can accept no responsibility for loss occasioned to any person, acting or refraining from action as a result of any material in this publication.

Copyright © Thomson Reuters 2013. All rights reserved

Republication or redistribution of Thomson Reuter’s content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. ‘Thomson Reuters’ and the Thomson Reuters logo are registered trademarks and trademarks of Thomson Reuters and its affiliated companies.

Copyright © 2013 FactSet Research Systems Inc. All rights reserved

©2013 BLOOMBERG L.P. ALL RIGHTS RESERVED

E-Book Distribution: XinXii

http://www.xinxii.com

Preface

Why have this manual?

Navigating the Maze is a guide aimed at those people looking to enter into banking and financial services. The manual focuses on both the undergraduate and postgraduate entrants, as well as those of you looking for a career change.

Many of you will gain initial experience as an intern. These internships are often just 8-10 week interviews. Secure an internship at an investment bank and you have greatly increased your chances of securing a job offer at the end of the process.

Internship training tends to be limited to three to five days. There will be a significant amount of material passed onto the interns, not only during this time, but also across the 10 week internship. There is a great deal to take in. This manual provides a very practical reference point to reinforce the in-class and on-the-job learning.

The manual will act as an aid to ensure continuing learning throughout the internship and also during the period between the end of the internship and the commencement of full-time employment.

Is Navigating the Maze useful whichever part of the bank you go into?

Navigating the Maze is aimed at interns intending to get into or already working within banking. At this level, much of the core subject matter is relevant across a number of divisions.

The manual will examine:

Interview skills

Your application and the process

Technical skills

Corporate banking

Credit

M&A

Capital markets origination

Asset management

Private wealth

Markets

Technology and operations

Preparing for work – turning your internship into a full-time offer

Bloomberg skills

Excel skills

Why is Navigating the Maze unique?

There are a number of generic publications in the market that will provide a myriad of interview tips and advice on how to get a job.

This manual differentiates itself from the entire market as it is written by professionals who have worked in the market, recruited in the market, and who, now being at 7city, will train the new entrants once they have secured their dream job within banking.

The manual has brought together experience from banking professionals from the banking division, sales and trading as well as experienced banking recruiters.

We want the reader of this manual to enter the recruitment process with their eyes wide open, 100% professionally prepared, and with a competitive advantage over the rest of the recruitment population.

The start of your working career can be daunting and the language can be confusing so we’ve prepared Navigating the Maze so you can hit the ground running and get ahead of your competition.

Good luck!

Geoff Robinson

Head of Banking, 7city Learning

The Navigating the Maze along with other components of the Complete Analyst series can now be purchased online at www.thecompleteanalyst.com

.

About 7city

Founded in 2000, we are a financial training company of 140+ people based in London, New York, Singapore and Dubai. Whether you want to pass the CFA to progress your career, or create graduate programmes to build a talent stream from Generation Y, we take your challenges and build solutions.

That can be by streamlining your way to the essential professional qualifications that you need. We train more than 15,000 candidates annually towards regulatory exams and CFA.

Or by helping you develop a more informed, effective, and skilful appreciation of the business in which you work. All our technical finance and management and personal development training programmes are designed to ensure theory is put into context using case studies, scenarios, and hi-tech simulations.

Or if you're a training professional, by partnering with you to create and run successful training programmes to meet your needs. Whether you've identified skills gaps in your Asian sales team because you're exploring new emerging markets, or you want to ensure that your multi-stream graduate intake are inducted into the world of finance and how you do business, we will create and deliver a tailored programme.

We work with nine out of ten of the top investment banks and three out of the top five banks (ranked by assets under management). We pride ourselves on our innovation, our enthusiasm for teaching and our commitment to client service. You'll find we're the source of the intellectual, as well as the practical, answers needed to succeed in a global marketplace.

Our ambition is to sharpen yours. We’re here to make you better at your job.

Contents

Preface

Why have this manual?

Is Navigating the Maze useful whichever part of the bank you go into?

Why is Navigating the Maze unique?

About 7city

Contents

Navigating the Maze

Section 1: Your Application

Your Application

What is banking?

What do these divisions do?

Asset management

What skill set do I need?

Corporate banking

Loans

Invoice finance/factoring

Asset backed

Trade finance

Risk management

Cash

What skill set do I need?

Private banking

What skill set do I need?

Markets

Sales

Trading

Research

Structuring

Money markets and forex

Derivatives and commodities

What skill set do I need?

Investment banking division (IBD)

Industry/client coverage

Product coverage

What skill set do I need?

Technology

What skill set do I need?

Operations

What skill set do I need?

Legal, compliance and risk

What skill set do I need?

Interactions between the investment banking division and markets

What to expect as an Analyst within a bank

What makes a complete Analyst?

An interview with a director at a bank

Preparing for the recruitment process

1. Research the financial services industry

Where to start?

What if you don’t have time to read the financial press each day?

2. Attend recruitment events

Recruitment event dos

Know about the event you’re attending.

Look the part

Be aware of your behaviour at all times during the event

Prepare questions for professionals from the line

Prepare questions for recruiters

Follow up with the contacts you make

Recruitment event don’ts

Don’t ask too many questions at a busy recruitment event

Don’t steal business cards

Don’t ask repeat questions

Don’t stalk your contacts

Don’t lose all self control when faced with a decent freebie or two

Don’t hang around awkwardly when you’ve exhausted your questions

3. Build up your CV

Why are extra-curricular activities and work experience important? Why can’t I just focus on getting good grades?

What kind of extra-curricular activities and work experience are valuable?

4. Decide what kind of role is right for you

What are your strengths?

In what kind of working environment do you thrive?

How important will it be to have an active social life?

What’s more important to you – people or process?

Is working in the back office a good way to get a front office role?

5. Writing your CV or application

Getting the format right

Contact details

Educational history

Language skills

Work experience

Your work experience will be instantly more compelling if you link the tasks or projects you worked on to quantifiable results.

Additional skills

Extra-curricular activities

6. The cover letter/motivational section

What not to write

What you should write

Why do you want to work in the industry?

Why do you want to work for the firm?

What you think you can bring to the organisation?

‘I have excellent attention to detail’

When to apply

Dealing with different bank’s deadlines

7. The first round interview

Preparation: Yourself

Mock interviews

Revising your CV

Preparation: The industry

Preparation: The firm

The firm’s culture

The firm’s businesses

Know the language of a firm

8. The day of the interview

9. During the interview

Introducing yourself

Answering behavioural/competency-based questions

Avoiding the generic

What if the interviewer does not ask for examples?

The STAR interviewing technique

Situation

Task

Action

Results

‘So what’s your biggest weakness?’

Menuing

Section 2: Your Interview

Your Interview

Providing colour to your response

Read the financial press

Read the research

Investment banking blogs

Accounting and Financial Analysis Q&A

The balance sheet

The income statement

The cash flow statement

What are the key components of a set of financial statements?

What is an asset?

Liabilities

Equity

Income

Expenses

What is meant by financial statement integration?

Why do accounts show depreciation and amortisation?

How can D&A numbers be manipulated?

How does…impact the financials?

How does depreciation affect the financial statements?

How does an impairment write-down affect the financial statements?

How does the purchase of an asset affect the financial statements?

What is the impact on the accounts of a company entering into a new lease of an asset?

Capital (finance) leases

Operating leases

Capital lease illustration

Leasing

How does a provision affect the financial statements?

Can companies revalue their assets?

Why would a company revalue its assets?

Why revalue?

Analysis impacts:

What is working capital?

What is net debt and how is it used?

Does net debt capture all of a company’s debt?

Operating lease commitments

Pension deficit

Debt within ‘equity accounted’ investments

Why is net debt ‘net’?

What does equity on the balance represent?

What is a minority interest?

What is the NOSH?

What is EBIT?

What is EBITDA?

How and why would you normalise a metric?

What are pro-forma numbers?

What does LTM mean?

What is EPS and how is it used?

What is the difference between basic and diluted EPS?

Earnings dilution

Weighted average number of shares

The impact of convertible debt on diluted EPS

What is equity dilution?

What is the treasury method?

Why is the cash flow statement so important?

How do you move from EBIT to operating cash flow?

Working capital adjustments

Why does profit not equate to cash flow?

How would you analyse a cash flow statement in five minutes?

What could a company do if it had excess cash on its balance sheet?

What type of pension schemes do companies have? Why are they sometimes problematic?

Potential problems with pensions

What is deferred tax?

Valuation Q&A

Why is valuation important?

What are the traditional valuation methodologies?

Comparable company analysis (‘Trading comps’ or just ‘comps’)

Comparable transactions analysis (‘Precedent or transaction comps’)

Discounted cash flow valuation (DCF)

Valuation isn’t just about theories and models – what else should an Analyst consider when valuing a company?

What is the difference between buy and sell-side M&A?

Which valuation techniques are likely to give the highest valuations?

What is a valuation football field?

What is market capitalisation and how do you calculate it?

What is enterprise value?

Walk me through a discounted cash flow

DCF valuation – a six-step structured approach

Step 1: Define the high growth period

High growth period

Terminal period

A typical two-stage DCF valuation model

Step 2: Forecast cash flows

Forecasting the FCFF drivers

Step 3: Estimate appropriate discount rate

Focusing on FCFF DCF valuations

Cost of equity (ke)

Cost of debt (Kd)

Weighted average cost of capital (WACC)

Step 4: Estimate the terminal value

Cash flow growth perpetuity

Multiple approach

Step 5: Discount the cash flows

Step 6: Valuation

Break down enterprise value to equity value

What is free cash flow to firm?

FCFF

What is beta?

Historical betas

Number of data points

Length and period of time

Market to be used as the basis for regression

Where can you source a beta?

Why and how would you de-lever a beta?

Why de-lever?

How to de-lever and re-lever

Walk me through a comparable company valuation

Illustration of a comps valuation

What are the pros and cons of EV vs. Equity multiples?

What are the pros and cons of using the EV/EBITDA multiple?

What drives an EV multiple?

Why would multiples of a company trade at a premium or discount to its peers?

What is a control premium?

What does a merger model do?

What factors can make a deal EPS accretive?

What are the pros and cons of equity and debt as transaction finance?

Equity consideration – benefits

Equity consideration – disadvantages

Cash/debt consideration – benefits

Cash/debt consideration – disadvantages

Who does what on a deal?

How can a company defend itself from a takeover?

Poison pills (legality will vary depending on jurisdiction)

Golden parachutes

Recapitalisations

Fire sale

Standstill agreements

White knight

Litigation

Pac man defence

What is a company profile?

What is a pitch book?

General pitch book

Deal-specific pitch book

Statistics and Financial Maths Q&A

What are the common measures of central tendency and dispersion?

The mean

The mode and range

The median

The inter-quartile range

What is standard deviation?

What is a geometric mean?

What is a correlation coefficient?

How can correlation be used to diversify risk?

What is a normal distribution?

Leptokurtic

Platykurtic

Mesokurtic

What is the difference between simple and compound interest?

Simple interest

Compound interest

What is discounting?

What is an annuity?

What is a perpetuity?

How is discounting used?

What is net present value?

What is the internal rate of return (IRR)?

What is a CAGR?

Equities Q&A

What are the basic characteristics of common stock or ordinary shares?

Right to vote

Right to a dividend

Right to a surplus on winding up

How do preferred stocks differ from common stocks?

Cumulative preferred stock

Participating preferred stock

Convertible preferred stock

Redeemable preferred stock

What is an ADR?

Why would a corporation choose to raise finance via an equity issue as opposed to a debt issue?

What are the advantages and disadvantages of being a publicly listed corporation?

What does ex-div mean?

What is the difference between primary and secondary markets?

How can new equity be issued?

Offer for subscription

Offer for sale

A placing

An intermediary offer

A vendor placing

What is stabilisation?

What is ‘book-building’?

What is underwriting?

Hard underwriting

Soft underwriting

What are the key stages in an IPO process?

Winning the mandate

Positioning and preparation

Marketing and investor education

Roadshow

What is a dual track process?

What is a syndicate?

What is a prospectus?

What is a pilot fishing exercise?

What is a Greenshoe option?

What is a secondary offering?

What are the advantages and disadvantages of a fully marketed book-built offering?

Advantages:

Disadvantages:

What is an accelerated book-built offering (ABB) or a placing?

Advantages:

Disadvantages:

What is a rights issue?

What is TERP?

An example of a right issue

What is an index?

What is the difference between a market capitalisation weighted index and an unweighted index?

What is the Dow Jones Industrial Average (DJIA)?

What is the Nasdaq?

What is the S&P 500?

What is the FTSE 100?

Money Markets Q&A

What are the money markets?

What is the inter-bank market?

How are inter-bank rates quoted?

What is commercial paper?

What is a certificate of deposit?

Fixed Income Q&A

Why would a corporate choose to raise finance via a debt issue as opposed to an equity issue?

What are the two main types of debt finance and what are their key features?

What is a bilateral loan/syndicated loan/club deal?

What are the advantages and disadvantages of loan finance?

Advantages of loans

Disadvantages of loans

What is a term loan?

Bullet term loan borrowing structure

Uses of term loans

What is a revolving credit facility?

Revolving credit facility borrowing structure

Uses of revolving credit facilities

What is the interest rate on a loan based on?

LIBOR + margin

What is LIBOR?

What is EURIBOR?

What is a covenant?

Who are the main credit rating agencies?

Why are credit ratings more important for bonds than for loans?

What is the lowest investment-grade rating?

What is a bond?

What are the key features of a vanilla bond?

Issuer

Nominal value

Coupon

Maturity

Typical cash flow profile of a bond

What are the advantages and disadvantages of bonds?

Advantages of issuing bonds

Disadvantages of issuing bonds

What is a floating rate note?

What is an index-linked bond?

What is a callable bond?

What is a putable bond?

What is a convertible bond?

What is a Eurobond?

How would you determine the coupon on a bond?

What is a high yield bond?

What is PIK?

What is the Yield to Maturity (YTM)?

Interest/flat/income yield

Simple or Japanese yield

What is the difference between a clean and dirty price?

What is duration?

What is a yield curve?

What is an asset backed security?

Collateralised bond obligations (CBOs)

Collateralised loan obligations (CLOs)

Mortgage-backed securities (MBSs)

Collateralised debt obligations (CDOs)

Derivatives Q&A

What is the difference between cash and derivatives securities?

What is the difference between OTC and exchange traded?

What is a future?

Futures jargon

The underlying asset

The long

The short

Price agreed today

Delivery date

Fair value

Interest rates

Storage and insurance

How are futures used in practice?

Speculation

Hedging

Arbitrage

What is basis?

What is the difference between contango and backwardation?

What is a forward contract?

What is a futures contract?

What is a long position on a future?

What is a short position on a future?

How does a future settle?

How can a future be used to hedge?

What is an option?

Option jargon

What are the basic option positions?

A long call

A short call

A long put

A short put

What drives the price of an option?

Intrinsic value

Time value

What factors influence the time value of an option?

Volatility of the price of the underlying asset

Interest rates (equity options only)

Call options

Put options

Dividends (equity options only)

Call options

Put options

Remaining life of the option

What is an interest rate swap?

What is a cross currency swap?

What is an equity swap?

What is a credit default swap?

What is a structured product?

Callable/putable bonds

Convertible bonds

Index-linked notes

Commodity linked bonds

What is arbitrage?

Foreign Exchange Q&A

How are foreign exchange rates expressed?

What is a cross rate?

How is foreign exchange quoted?

What is a forward forex deal?

How are forward rates quoted?

How are forward exchange rates determined?

Interest Rate Parity (IRP)

What is the Fisher effect?

Asset Management Q&A

What is asset management?

Risk

Liquidity

Growth

What is portfolio construction?

What is the efficient market hypothesis?

The Weak Form of the EMH

The Semi-Strong Form of the EMH

The Strong Form of the EMH

EMH conclusions

What is passive fund management?

What is active fund management?

Top-down

Asset allocation

Sector selection

Stock selection

Bottom-up

Summary

How can portfolio performance be measured?

Holding period yield

Money weighted rate of return (MWRR)

Time weighted rate of return (TWRR)

What is risk?

What is a risk premium?

What is the difference between systematic and non-systematic risk?

Business risks

Industry risks

Management risks

How can risk be measured?

What is the Sharpe ratio?

Section 3: Preparing for Work

Preparing for Work

Life as an intern

Be a sponge – suck it up!

Perception is everything

Build relationships

Identify decision makers early

Think about reviews

Learn to talk the talk

Honesty is not always the best policy.

Patience is critical

Ask questions!

Keep track of your projects

It’s all in the approach

Don’t expect a thank you

What will your typical day be like?

An example day as an intern

The Internship

Training

Punctuality

During training events

Dealing with work/training conflicts

But I’m already advanced on Excel…

Personal skills training

Work/life balance

Know that it will get easier

Take breaks when you can

Only work the hours that you need to

Get a routine

Diet

Exercise

Joining your team

Introducing yourself

Making the best first impression

Remember names

Show genuine interest

Look for clues

Getting to grips with how your team works

Understanding tasks given to you

So if I have this correct…

When you really have no idea: Look for questions not answers

Output questions: What exactly am I trying to achieve?

Action-orientated questions: How should I achieve this task?

Context questions: Why does this task need to be done?

Building confidence

How do I raise my confidence?

Your shoulders

Take up space

Control your hands

Your voice

Appendix 1: Bloomberg for Analysts

Introduction

Bloomberg skills coverage

The Bloomberg keyboard

Using Launchpad

Exporting Data from Bloomberg

Finding a Company Ticker

The Equity Screen

Accessing Shareholder Data (Holders)

Getting NOSH via the Description (DES) Screen

Accessing Company Filing Data

Finding Company News (and Research) for Normalisation Purposes (Corporate Actions)

Picking a Relevant Broker Report (Company Research)

What are the Current Analyst Recommendations (Analyst Recs)?

Getting Share Price Data (Graph Price)

Annotating Bloomberg Share Price Graphs

Creating a Relative Share Price Graph

Importing Bloomberg Share Price Data into Excel

Getting a Hoover’s Profile

Accessing the Related Securities Screen

Accessing the Issuer Description Screen

Creating Government (International) Yield Curves

Creating Yield Curve Analysis (‘Yield Curve Relative’)

Credit Profile Summary

Creating a Bloomberg Beta Profile

Accessing the WACC Profile

Accessing the New Issues Monitor

Accessing Debt Term Sheets

Creating Debt Maturity Profiles

Accessing Money Market Rates

Accessing Forex Rates

Accessing World Equity Indices

Accessing Economic Data

Using the Bloomberg MA Search Functionality

Creating League Tables

Bloomberg News Codes

Appendix 2: Excel Shortcuts

Movement/selection

The basics

Auditing

Names

FactSet

Introduction

FactSet Application

Here are some helpful tips:

How to store a list of comparable companies on FactSet

Office applications

Research companies in depth

Share price data

Company filings

Download multiple PDF TravelBooks

Exporting data from FactSet

Updating and maintaining custom template models, reports, and presentations in Microsoft Excel, Word, and PowerPoint

Excel tools

Updating team Comps Models

Step 1

Step 2

Step 3

Updating your model

Downloading ‘Ready-made’ Models:

Improve efficiency and productivity in everyday tasks

FactSet Hotkeys

Link Excel charts/tables to PowerPoint or Word

Use ActiveGraph to create easy-to-update, PitchBook-ready financial graphs using your firm’s corporate colours, fonts, and standards Available in Microsoft Word, PowerPoint and Excel

Index

1: Introduction

Navigating the Maze

Navigating the Maze has been written as a guide for those who want to work in banking and financial services. Whether you are an undergraduate or postgraduate student, or even someone looking for a career change, this manual will provide you with the information you need to start your investment banking journey.

The starting point for many bankers is their internship. An internship is, on the face of it, a good chance to get work experience at a bank. For many, it is actually an 8-10 week job interview. Secure an internship and you have greatly increased your chances of getting a job offer at the end of the process.

This manual provides a comprehensive guide to your internship. We can advise you how to apply for your internship, what to do at your interview and also give you advice about what work as an intern will be like. Our advice also covers what you should do to land a full-time job at the end of your experience.

Our authoring team includes people who were in charge of hiring