How to answer markets & deals questions in investment banking interviews

In this article

1. Before you start
2. Why interviewers ask this
3. Markets & deals questions from first principles
4. Worked example
5. Trade-offs and edge cases
6. How to answer it in an interview
7. Common mistakes
8. Follow-up questions
9. Sources

Before you start

This page is one part of the investment banking interview questions guide. It teaches the deal half through accretion and dilution, and the markets half through the yield curve.

Why interviewers ask this

A candidate who can do technicals but cannot discuss a live deal or the markets sounds like someone who has studied and not followed anything. One interview guide says investment banking questions fall into four groups: your story, fit, deals and markets, and technicals, and adds: "Expect at least one question about a recent deal or the markets too."

Expect to be pushed from the story of a deal to its arithmetic, and from a market move to its cause. A weak answer recites headlines. A strong answer states the facts in one sentence, explains the logic, tests it with a number such as accretion, and names what could go wrong. It also separates what you know from what you are guessing. The technical side of the same round is covered in investment banking technicals.

Markets & deals questions from first principles

Accretion

Accretion is the increase in a buyer's earnings per share after a deal closes, measured by comparing the combined company's pro forma EPS with the buyer's standalone EPS. A buyer that ends with lower earnings per share has instead suffered a decline, called dilution. Both words describe EPS only, not whether the deal creates value.

Pro forma EPS

Pro forma EPS is the earnings per share of the combined company as if the deal had already closed. It is the combined net income, adjusted for synergies, financing costs, interest lost on cash used and new amortization, divided by the combined diluted shares outstanding. It is a modeled figure, not a reported one.

Yield curve

A yield curve is a chart of the interest rates, or yields, on Treasury debt at different maturities at one point in time, so it shows how much it costs to borrow for different periods. It is read by its slope: when long-term yields sit above short-term yields the curve slopes up, and when they sit below, it slopes down.

In plain words

Picture a pizza cut into 100 slices (illustrative), one per share. The company buys a second pizzeria. If the extra pizza adds more food than the cost of paying for it, every slice grows. If the buyer also hands out new slices to pay, the food must be shared among more people. Accretion asks whether each slice ends up bigger.

The analogy breaks in one place: real deals also carry interest costs, one-off fees and the risk that promised savings never arrive. In one precise sentence, a deal is accretive when pro forma EPS exceeds standalone EPS, and the markets half of the interview asks you to read prices, such as Treasury yields, as signals of what investors expect.

Step 1: Start from the buyer's standalone EPS

Standalone earnings per share is the buyer's net income divided by its diluted shares, and it is the benchmark every deal is judged against. Wall Street Prep describes accretion as an increase in pro forma EPS after a deal and dilution as a decline, and writes the test as (pro forma EPS ÷ standalone EPS) − 1; its simple illustration is 1.10 dollars against 1.00 dollar, a 10% accretion.

This page uses an illustrative buyer with 2.00 dollars of EPS and 100 million diluted shares, so net income is 200 million dollars.¹ The analysis mainly fits public companies, because their valuations are often based on earnings and EPS.

Input: the buyer's net income and diluted shares. Output: one standalone EPS number. You now have the line the deal must beat.

Step 2: Build pro forma net income

Pro forma net income is the acquirer's income plus the target's income plus after-tax synergies, minus after-tax financing cost, minus after-tax interest lost on cash used, minus after-tax amortization of newly recognized intangibles. Synergies are savings or extra revenue the deal is expected to create, and financing cost is the interest paid on debt raised to fund the purchase.

In the illustrative case the target earns 30 million dollars. Synergies of 10 million dollars before tax become 7.5 after a 25% tax rate. The buyer borrows 300 million at 6%, which is 18 before tax and 13.5 after tax. Pro forma net income is 200 plus 30 plus 7.5 minus 13.5, or 224.0 million dollars.¹ Both extra terms are zero here, because no cash is used and no assets are written up.

Input: the income lines and the adjustments. Output: pro forma net income.

Step 3: Add the new shares

New shares issued equal the stock part of the price divided by the buyer's share price. If the buyer pays only in debt or cash, no new shares appear and the share count stays put.

Take an illustrative price of 600 million dollars paid half in stock. The stock part is 300 million; at a share price of 40 dollars the buyer issues 7.5 million new shares, so pro forma diluted shares are 100 plus 7.5, or 107.5 million.¹ In a stock deal the terms are often quoted as an exchange ratio, which is the number of buyer shares paid for each target share. In the Oclaro and Opnext filing it was 0.42 Oclaro shares for each Opnext share.

Input: price, stock share of the payment, buyer share price. Output: pro forma diluted shares.

Step 4: Read the result, then explain why accretive is not the same as good

Pro forma EPS divided by standalone EPS, minus one, is the accretion test, and a positive result does not make the deal a good one. Here pro forma EPS is 224.0 divided by 107.5, or 2.0837 dollars against 2.00 dollars, an accretion of 4.19%.¹

Accretion ignores risk, the cost of capital and whether synergies arrive. Without the 10 million dollars of synergies the same deal adds only 0.70%.¹ The Oclaro and Opnext filing shows results that swing widely across synergy cases: on adjusted EPS under generally accepted accounting principles (GAAP) every case is dilutive in 2013E (E = estimate), by 9.6% to 104.9%, and accretive in 2014E, by 83.3% to 318.7%. So say whether the deal is accretive, in which year, and how much of that rests on synergies. You can now answer the follow-up.

1 · Standalone EPS2 · Pro forma income3 · Pro forma shares4 · Accretion testReplay

Step-by-step description

1. Start from the buyer's own EPS.
2. Add the target and synergies, subtract financing, lost interest and new amortization.
3. Add the new shares issued.
4. Pro forma EPS over standalone, minus one.

• Pro forma net income is the acquirer's income plus the target's income plus after-tax synergies, minus after-tax financing cost, lost interest on cash used and new amortization.
• Accretion is pro forma EPS divided by standalone EPS, minus one.

Markets half: what the yield curve shows and why it inverts

The yield curve plots Treasury yields across maturities at one point in time, and Brookings says it reflects market expectations about future Federal Reserve (the Fed) rate moves. The Fed sets short-term rates by targeting the federal funds rate, the rate at which banks lend to each other overnight.

An inverted yield curve is one where short-term yields sit above long-term yields. The Boston Fed says a common cause is a temporary rise in the short rate while the long rate rises less, because it reflects an expectation that short rates will fall back. The slope, the long yield minus the short yield, has predictive power for recessions.

Conventions differ: academic work often uses the ten-year note minus the three-month bill, so state which pair you mean. The same letter says the curve is influenced by more than expectations of monetary policy.

How to prepare for a markets question

A markets question asks what a price is doing, why, and what you would watch, so prepare live figures with their as-of dates. Read the 10-year Treasury yield from FRED (the Federal Reserve Bank of St. Louis's data service) or the Treasury's own yield pages, the federal funds target range from the Federal Reserve, and the level of one major stock index, and write down the date you read each.

Then answer in three parts: the instrument and its move, the cause, and what you would watch next. For example: "The 10-year yield is X as of date D, up Y this month, because of Z; I would watch W." Say what you do not know, and never quote a figure without its date, because markets move daily.

Deals half: enterprise value, equity value and fairness opinions

Enterprise value (EV) is the value of a company's core business to all its investors, so it equals equity value plus debt plus preferred stock plus noncontrolling interest minus cash. If a company raises 100 dollars of debt (illustrative) and holds the cash, one interview guide answers "Nothing" happens to EV, because debt and cash rise by the same amount.

A fairness opinion is a letter in which an investment bank says that a deal's price is fair, from a financial point of view, to a company's shareholders. It is not an independent verdict. Under the Financial Industry Regulatory Authority (FINRA) Rule 5150, a member firm that knows an opinion will be given or described to public shareholders must disclose whether it acted as financial advisor to any party and whether it will be paid contingent on completion. The rule also requires procedures to judge whether the valuation analyses used are appropriate. The Federal Register notice describes the aim as informing shareholders of potential conflicts.

Worked example

The same illustrative buyer and target run through seven cases, all computed in one script.¹ The buyer has 2.00 dollars of EPS, 100 million diluted shares and a 40-dollar share price. The target earns 30 million dollars and costs 600 million. Debt costs 6% before tax, the tax rate is 25%, and synergies are 10 million dollars before tax.

Why the order? The target earns 5.00% of its price (30 over 600), while debt costs 4.50% after tax (6% times 0.75), so debt-funded earnings exceed the interest.¹ The buyer's price-to-earnings ratio is 20 (40 over 2.00) and the target's is 20 (600 over 30), so paying in stock without synergies changes nothing. These comparisons are computed here, not taken from a source.

With synergies, accretion is 5.25% for all debt, 4.19% for half stock and 3.26% for all stock. The all-stock deal without synergies is exactly neutral at 0.00%.¹

Borrowing costs matter too. If the debt rate rose to 8% before tax, the after-tax cost would be 6.00%, above the target's 5.00% earnings yield, and the all-debt case without synergies would turn dilutive at (3.00%).¹ That is why higher rates make debt-funded deals harder to justify, although interest rates are only one input into deal activity.

Text description of the diagram

• With synergies, accretion is 5.25% for all debt, 4.19% for half stock and 3.26% for all stock.
• The all-stock deal without synergies is exactly neutral at 0.00%.

Trade-offs and edge cases

An accretion number depends on which EPS you use. Real filings show several, such as earnings per share under generally accepted accounting principles, so say which one you computed.

Timing is the other trap: a deal can be dilutive in year one and accretive in year two, as the Oclaro and Opnext figures in Step 4 show, and the worked example reaches the same shape when one-off costs hit year one. Private targets are a third case, because the method mainly fits publicly traded companies. On the markets side, an inversion is a signal about policy stance and expectations, not a dated forecast, and the Chicago Fed letter says the curve is influenced by more than monetary policy expectations. For wider deal technicals see mergers and acquisitions questions and answers.

How to answer it in an interview

A strong spoken answer follows four moves: the facts of the deal, the rationale, the numbers, then the risks.

Text description of the diagram

• The risks move comes last in the spoken answer.
• A strong spoken answer follows four moves: the facts of the deal, the rationale, the numbers, then the risks.

The risks move comes last in the spoken answer. Below is a model answer for a deal you have followed, then a short model answer for the accretion walk-through that sits inside its numbers move.

Interviewer: Is this deal accretive or dilutive, and how would you check?

You: I compare pro forma EPS with the buyer's standalone EPS. Pro forma net income is the buyer's income plus the target's, plus after-tax synergies, minus after-tax interest on new debt, interest lost on cash used and new amortization. I divide that by the old shares plus any new shares issued. Then the test is pro forma over standalone, minus one. A quick check is to compare the target's earnings yield with the after-tax cost of each funding source. Accretion ignores risk, the cost of capital and whether synergies arrive, so I also say what it looks like without synergies.

The spoken structure for the accretion answer: give the formula, give the inputs in order, state the test, then name what accretion misses. For a markets question use the same shape: name the instrument and its move, give the cause, then say what you would watch. For a full valuation walk, see how to walk through a discounted cash flow (DCF) valuation, and for model mechanics see financial modeling interview questions.

Common mistakes

• "Accretive means it is a good deal." (wrong) EPS ignores risk and the cost of capital. (right) "It is accretive by this much, and here is what the number depends on."
• "I just add the two net incomes." (wrong) That skips synergies, financing cost, lost interest on cash, new amortization and new shares. (right) "I add the target's income and after-tax synergies, subtract after-tax financing cost, lost interest on cash and new amortization, and divide by the new share count."
• "The yield curve inverted, so a recession is coming." (wrong) The curve reflects policy and expectations, and other forces move it too. (right) "It has predictive power, but it is a signal, not a date."
• "Raising debt raises enterprise value." (wrong) Cash rises as debt does. (right) "If the company holds the cash, enterprise value is unchanged."

Follow-up questions

Is a deal that is accretive to EPS always a good deal?

No. Accretion is a statement about earnings per share, not about risk, the price paid or the cost of capital. In the worked example the same deal is 4.19% accretive with synergies and 0.70% without them.¹

Can a deal be dilutive in year one and still be worth doing?

Yes, if later years are accretive and the assumptions hold. The Oclaro and Opnext table shows dilution in 2013E and accretion in 2014E in every synergy case.

What happens to enterprise value if a company raises debt and keeps the cash?

Nothing: debt and cash rise by the same amount, so enterprise value is unchanged, as this guide notes with a 100-dollar example.

Does an inverted yield curve mean a recession is coming?

It is a signal with predictive power but not a certainty, since the Boston Fed says inversion often reflects a temporary policy tightening and expectations of lower rates later.

Why does a bank give a fairness opinion, and can you trust it?

It tells a board and shareholders that a price is fair from a financial point of view. Treat it as one input: FINRA Rule 5150 requires disclosure of the advisor's role and any fee contingent on completion because of possible conflicts. Neighboring corporate finance topics are in corporate finance interview questions.

Sources

1. Merger Model (M&A tutorial) — Wall Street Prep, 22 Mar 2024
2. Oclaro / Opnext Form S-4/A, Blackstone accretion and dilution analysis — SEC EDGAR, 1 Jan 2012
3. Oclaro / Opnext Form 424B3 (same analysis, accretion table) — SEC EDGAR, 1 Jan 2012
4. Perrigo / Agis Form S-4, pro forma EPS analysis — SEC EDGAR, 1 Jan 2004
5. FINRA Rule 5150, Fairness Opinions — FINRA rulebook, 8 Dec 2007
6. Notice of filing of a proposed rule change on fairness opinions — Federal Register, 10 Jul 2008
7. The Hutchins Center Explains: The yield curve — Brookings Institution, 1 Jan 2022
8. Predicting Recessions Using the Yield Curve — Federal Reserve Bank of Boston, 1 Jan 2020
9. Chicago Fed Letter 2018/404 — Federal Reserve Bank of Chicago, 1 Jan 2018
10. Investment banking interview questions guide — Extern, 21 Oct 2026