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Master Financial Modelling for Investment Banking | Complete Guide

Posted on by Imarticus Learning

Investment banking career is perhaps one of the most elite careers within the entire financial world and also a highly paid one. The investment banking industry requires professionals who stand up to handle business deals, from millions to acquisitions, mergers and acquisitions, flotations, IPOs and many others. All of them are complex and nuanced subjects which call for financial modeling for these transactions.

Financial modelling is the heart and core of any investment banking decision. It might be valuing companies, analysing risks associated with them, or structuring deals in investments: financial models help make such decisions based on data-driven information.

Knowledge regarding financial modelling techniques is pretty essential for building up a healthy career in investment banking.

👉 Further Reading: What is Financial Modelling? (Investopedia)

Types of financial models used in practice

How to develop step-by-step guide to a financial model

  • Financial modelling as a tool to support the process of valuation, risk analysis, and making decisions overall.
  • Recommended courses for investment banking for financial modelling
  • Salaries and careers, case studies from actual practice
  • Mistakes and errors usually done in financial modeling
  • Current advanced techniques in financial modeling with hedge funds and private equity.

You will learn financial modelling in every detail through this guide. This blog topic is a clear roadmap for mastering investment banking skills.

What is Financial Modelling?

Definition & Importance

Financial modelling is the process of structuring a representation of a company’s performance. It does this by simulating future financial performance, valuation, and risk assessment using historical data, assumptions, and projections.

A financial model is applied by:

Investment bankers, hedge fund managers, equity researchers, etc. need them for strategic decisions in corporate finance and other related fields.

Application of a Financial Model

  • To analyze the company before merging or acquiring, or for its Initial Public Offering
  • To analyze the investment opportunities and the risk that accompanies them
  • For estimating their probable financial performances and cash flow
  • In Corporate Finance and financial planning
  • It helps in structuring financial deals and plans relating to capital raising.

Advanced professionals would use Python, SQL, R, Power BI, or Tableau for automating the presentation.

The Importance of Financial Modelling in Investment Banking

The services offered by investment banking services are complex financial deals; and in those financial deals, accuracy, valuation, and risk analysis are the front-line requirements. So, data-driven insights are very crucial inputs behind billion-dollar deals.

Why Investment Bankers Use Financial Modelling 

  1. Valuation & Investment Decision Making

In M&A, IPO pricing, and corporate finance advisory.

It would help the investment banker to get the fair market value of the firm before the deal could happen.

  1. Risk Analysis & Financial Modeling
  • Experts can foresee how the company would be performing in case of an economic downturn.
  • Experts can best handle the risk in terms of finances with the support of sensitivity and scenario analysis
  1. Deal Structuring & Fund Raising

Financial models would be a template for the IPO, debt financing, and an equity transaction. A model would present what kind of capital structure the firm is going to require.

  1. Data-Based Client Reports

An investment banker needs to let his clients know what result is coming out from proper information. A built model can make a great case in front of the investor and stakeholders.

Types of Financial Modeling applied in Investment Banking

The methodology of financial modelling is decided by an investment banker depending on the deal type and mode of financial investing.

  1. Discounted Cash Flow (DCF Model)

Under this model, it approximates the free cash flows that any company may receive in the short term and takes it value back to the date of the current value.

This could be used when valuing the business and on its stock as well as investment chances.

  1. Comparable Company Analysis (CCA)

This involves gathering multiples from the industry of comparable companies in terms of valuations. Determined for calculation of the company’s relative market value.

  1. Precedent Transactions Analysis

It utilises historical M&A transactions in formulating an argument for the valuation multiples. Infer the emerging value of the company in case an acquisition takes place

  1. LBO Model

Whether the company would be bought on debt or not. The model is very widely used by private equity houses.

  1. M&A Model

It infers whether the acquisition would be accretive or dilutive to earnings.

Building a Financial Model: Step by Step

Step 1: Purpose of the Model

Specify the purpose for valuation, risk analysis, or investment decisions

Step 2: Historical Data

Memos: Obtain the income statements, balance sheets, and cash flow statements.

Step 3: Core Assumptions

Get the growth rates, interest rates, revenue trends, and discount rates

Step 4: Core Financial Statements

It formulates an integrated income statement, balance sheet, and cash flow statement.

Step 5: Sensitivity & Scenario Analysis 

It will focus on best case, worst-case, and base case scenarios.

Step 6: Validate the Model & Stress Test    

All the calculations must be logical & precise.

Investment Banking Professionals Salary & Career Growth in India

Years of Experience Annual Average Salary (â‚ą)
Fresh Graduates 8,00,000 – 12,00,000
Middle-Level Professionals 15,00,000 – 30,00,000
Senior-Level Professionals 30,00,000 – 60,00,000

Frequently Asked Questions – FAQs

  1. What is financial modeling in investment banking?

Financial modeling is the projection of a company’s performance through financial presentation.

  1. How long does it take to learn financial modeling?

Generally 8–12 weeks with serious practice.

  1. Does financial modeling certification have value?

Yes, investment banking courses like CIBOP lead to employment.

Key Takeaways

Financial modelling is essential for investment bankers to analyse valuations, assess investments, and structure deals.

Different models serve different purposes, from DCF for valuation to LBO for private equity transactions.

Investment banking offers lucrative salaries, and mastering financial modelling through courses like CIBOP can accelerate career growth.

Want to get into Investment Banking? The Certified Investment Banking Operations Professionals (CIBOP) Program trains the candidates for practical investment banking.

Now Enrol in our program today CIBOP.

Fixed Income Securities: Corporate Bonds, Treasury Bonds, Municipal Bonds, etc., and Other Securities

Posted on by Imarticus Learning

Fixed-income securities, including corporate, government, and municipal bonds, are the cornerstone of conservative investing, providing stability and generating income. We emphasise the extreme importance of diversifying investment portfolios. Diversifying into different asset classes, such as fixed-income securities, is a good strategy and way to reduce risk and achieve long-term financial goals.

To build a career in investment banking, read this insightful article and learn about the best investment banking certification! This comprehensive guide will first look at fixed income and explain their nature and meaning.

Corporate Bonds

Corporate bonds are debt securities issued by companies to raise capital. These bonds have different characteristics, such as a fixed interest rate called a coupon and a predetermined term for repayment of the principal. They are considered relatively low-risk compared to other fixed-income securities.

Commercial loans also offer portfolio diversification opportunities. However, they involve risks, especially credit risk, in which the issuer may not make interest payments or principal repayments. Assessing credit ratings, industry trends, and a company’s financial condition is critical before investing. 

Treasury Bonds 

Treasury Bonds are an important debt instrument. These are government bonds that are known for their safety and are backed by the full faith and credit of the government. These bonds are distinguished by their long-term maturity period. The longer period makes them an attractive option for investors with long-term financial goals who are not looking forward to immediate liquidity needs.

These play a major role in financial markets as they influence interest rates and act as benchmarks against other interest-bearing investments, thereby making them a cornerstone of investment portfolios and financial planning.

Municipal Bonds

Municipal loans play a crucial role in financing community development as a whole. One of the important advantages of municipal bonds is their benefits. The biggest advantage of interest income that is earned on most municipal bonds is that it is exempted from income tax.

One should be aware of the risks associated with municipal bonds. Investors should assess the issuer’s credit status based on information obtained from credit ratings and financial statements. Therefore, proper diversification of different municipalities and maturity can help reduce risks. A comprehensive banking course can help individuals understand this better. 

Risks Associated with Fixed-income Securities

Understanding and managing these risks is critical when including fixed income in your investment portfolio. One must take a banking and finance course to know more about associated risks. Diversification and thoughtful risk assessment can help reduce potential losses.

  • Interest rate risk: This risk arises when interest rates in the larger economy fluctuate. As interest rates rise, the market value of current fixed-income instruments falls, affecting bond prices. Bond prices often climb when interest rates decrease.

  • Liquidity risk: Liquidity risk arises when buying or selling a fixed-income security at the desired price and at the desired time, if it is difficult. Less liquid bonds may require investors to sell at a discount, causing potential losses.

  • Inflation risk: Inflation weakens the purchasing power of interest-bearing investments, especially if the accumulated interest does not keep pace with price increases. Investors may experience reduced real returns in an inflationary environment. 

Building a Diverse Portfolio

For a career in banking and finance, one should know how to build a diverse portfolio of assets. Diversification has many benefits for you as an investor, but one of the biggest is that it can improve your potential returns and stabilise your results. By owning multiple assets that perform differently, you reduce the overall risk in your portfolio so that no investment hurts you too much.

Because assets perform differently in different economic times, diversification reduces your returns. While stocks may fall, bonds may rise and CDs may remain stable. If you hold a different amount of each asset, you get a weighted average of the performance of those assets.

While you won’t make amazing returns owning just one rocket ship, you won’t suffer its ups and downs either. Although diversification can reduce risks, it cannot eliminate all risks. Diversification reduces asset-specific risk – that is, the risk of owning too much of one stock (such as Amazon) or stocks in general relative to other investments. However, this does not eliminate market risk, which is the risk of owning this type of asset. One should go in for investment banking courses online to learn about more such insights into trading.

Current Trends in the Fixed-income Markets

Current interest rate market trends and forecasts are impacted by a variety of variables and are relevant to investors. Fixed-income assets are heavily influenced by economic variables such as interest rates, inflation forecasts, and creditworthiness.

Central banks play an important role in these markets, and their policies, such as quantitative easing and interest rate changes, have a large influence on bond rates and market dynamics. Investors are increasingly exploring creative techniques such as ESG (Environmental, Social, and Governance) bonds and sustainable investing to match their portfolios with social and environmental goals.

Furthermore, demand for high-yield fixed-income products, the introduction of digital bonds, and the expansion of fixed-income exchange-traded funds (ETFs) are altering the market. Keeping up with these emerging trends is important for investors who want to effectively navigate the fixed-income market and adapt to changing economic environments. 

Conclusion

The Certified Investment Banking Operations Professional Course from Imarticus Learning is a valuable investment for aspiring financial professionals. This investment banking course helps students develop the skills and knowledge that they need to be successful in the investment banking domain. It focuses on real-world applications and provides students with the opportunity to practise the programs in a hands-on environment. It increases career opportunities and instils confidence and competence in participants.

Choose Imarticus Learning for such an investment banker course for a strategic step towards a successful and fulfilling career in finance!

Internal Rate of Return (IRR): Definition, Benefits and Guide

Posted on by Imarticus Learning

IRR or internal rate of return is a metric to calculate project revenue without considering external economic factors. This tool is more useful when used for comparative analysis rather than a single, isolated value. It helps in making better investment decisions and smarter project choices.

For a career in investment banking, it is vital to know the details of a variety of financial tools, one of them being the IRR. Here’s your guide to know its definition, calculation, benefits and drawbacks, and much more.

Defining Internal Rate of Return

Internal rate of return or IRR is a tool in financial analysis, which helps to estimate the profitability or revenue from a potential investment venture. It is a discount rate at which the return from any project is equal to its original investment value. Thus, this tool helps to achieve a break-even point by equalising the total cash inflow and outflow and helps to determine the most profitable project.

Formula

Internal rate of return works to make the net present value or NPV zero, thus ensuring a break even. It can be calculated by the following formula:

IRR Formula

Calculating IRR

The simplest way to calculate the internal rate of return is to use Microsoft Excel, which is one vital tool taught in any investment banking course. The ideal way to determine IRR is the trial and error method, where you have to take various discount rates to make NPV zero. It is in the character of IRR that you cannot calculate it analytically, but rather use trial and error methods.

Given are the steps to calculate IRR:

  1. Take the project’s offered discount rate to calculate NPV.
  2. Fill the remaining values in the formula.
  3. Check if the value is positive, only then proceed to the next step.
  4. Now the NPV is taken as zero. In the formula, fill in an assumed discount rate by trial and error method. This will give an NPV value very close to zero.
  5. Finally, compare the Discounted Rate with IRR. If the NPV is positive, and the IRR is higher than Discounted Rate, then you can invest in the venture.

What is the purpose of IRR?

Internal rate of return helps in the comparative analysis of projects and helps to determine which project offers the highest revenue. It further helps in understanding whether it is profitable to establish fresh operations or expand the existing ones.

For instance, if you have a textile shop, you can use IRR to determine whether you should open a new branch or renovate and expand the already existing shop. Both avenues can be worthwhile for the investor. However, the comparison proves that either one is more profitable and logical.

What Factors Can Affect IRR?

Given below are some vital factors which affect IRR:

  • Market Momentum
  • The overall strength of the economy
  • The strategic position of the project
  • Business performance
  • Overall debt level

Benefits of Internal Rate of Return

IRR is a valuable kit for analysing the profitability of potential investments. Before enrolling in an investment banker course it is vital to know the importance of internal rate of return. Here are its advantages:

Ease of use

It is a simple calculation tool that helps the investor compare and consider potential projects. Furthermore, the investor can also use IRR for budgeting and generate funds for purchasing fresh equipment instead of repairing it.

Doesn’t incorporate the hurdle rate

The cost of capital or hurdle rate is the required return rate which is agreed upon by the investors towards funding a project. Being subjective in nature, hurdle rate is always an estimated value, and thus can cause incorrect values. IRR doesn’t require a hurdle rate like capital budgeting and is thus more accurate.

The time value of money is considered

Money loses worth over time, and thus present money is more valuable than money to be received in the future. This is because the present money that you have can be invested towards future ventures. IRR regards this money value.

Drawbacks of Internal Rate of Return

Although IRR is simple and easy to use, it’s not free from drawbacks. Here are its disadvantages:

Disregards project size
The internal rate of return calculates a project’s profitability irrespective of its size. IRR simply compares cash flow to the total volume of capital outlay responsible for the cash flows. This proves to be a disadvantage in projects demanding different capital outlay levels, wherein the tool can make smaller ventures more attractive.

Future costs are ignored
IRR completely disregards any future costs which can affect the project’s profitability. For instance, if you want to invest in a car, and in the future the fuel price rises, then it will significantly affect the profit margins.

Internal Rate of Return and Return on Investment: Key Differences

Internal rate of return and return on investment are both crucial tools covered in any banking course. For an attractive career in banking and finance, it is important to know the difference between the two. ROI or return on investment will inform you about the total growth of your investment. However, IRR talks about the annual growth rate of a project. For a single year, the two values are the same but change significantly over a longer time span.

Internal rate of return also ends up putting NPV or net present value of the cash flows as 0 in a discounted cash flow analysis. Meanwhile, this is not the case with the CFROI (cash flow return on investment) valuation metric.

Summing Up

Internal rate of return is a useful tool, which helps in making justifiable financial decisions. It helps companies determine which investment would earn them the highest revenue and thus helps them in business growth.

Opt for a banking and finance course to ensure a smooth career in banking and finance. An investment banking certification like the one offered by Imarticus can be your career changer. Imarticus offers the Certified Investment Banking Operations Professional, one of their flagship programs, which promises to make you an adept investment banker.

The program covers all the basic and advanced details, like fundamental pillars of marketing, trade cycles, risk mitigation and so on. Explore Imarticus to learn more about such varied investment banking courses online!

Top 5 careers in money market

Posted on by Imarticus Learning

The money market is the most lucrative field. It offers a host of career opportunities with high pay and excellent job security. Whether you’re looking for a high-paying, stable job with amazing benefits and long-term career prospects in the money market – we’ve got it right here.

This blog will discuss the top 5 careers in the money market for 2022. These jobs are in demand and offer excellent pay and benefits. So, without further ado, let’s get started!

A career in the money market is a perfect choice if you look for a job with high pay and excellent benefits. It offers tremendous flexibility and the opportunity to learn new skills that can help you advance your career. 

Here are the five careers in the money market for 2022:

An Investment Banker

It is the most popular career choice in the money market. Investment bankers are responsible for helping companies raise capital by issuing and selling securities. They also advise clients on financial matters such as mergers and acquisitions. 

Stockbroker

A stockbroker can make up to six figures a year, depending on experience and qualifications. Stockbrokers help clients buy or sell stocks by connecting them with other people interested in buying or selling those same shares of ownership rights in corporations. They also provide advice on which stocks to buy or sell.

Financial Analyst

A career as a financial analyst is an excellent choice if you want to work in the money market. They are responsible for providing information and analysis on the financial health of companies. They make recommendations to management on how to improve the company’s finances.  

Financial Manager

A career as a financial manager is another great option in the money market. They develop and implement strategies to increase revenue and reduce costs. Their average salary is around  ₹991,180 per annum.

Financial Advisor

A financial advisor can make up to six figures a year, depending on experience and qualifications. Financial advisors provide advice on investments, taxes, and insurance policies. They also help people manage their finances, such as retirement planning or saving for college tuition costs. Their average salary is around â‚ą4,25,271 per year.

These are just some of the top careers in the money market for 2022. There are many different options available, but these five will give you an idea of what types of jobs might be available if you choose this path!

Explore courses for investment banking with Imarticus Learning

This 180-hour CIBOP (Certified Investment Banking Operations Professional) course will comprehensively equip students for a career in investment banking operations, treasury, or clearing services. Learn investment banking by understanding complex securities and derivative products, their trade-lifecycles, and the activities associated with investment banking operations.

Due to this partnership, learners interested in pursuing careers in investment banking will access the LSE Group Academy’s best-in-class learning content, given by top-rated professors.

Course Benefits For Learners:

  • Students at Imarticus Learning work in most of the world’s investment banks with the CIBOP accreditation, which the London Stock Exchange recognizes!
  • Impress employers and demonstrate expertise by enrolling in investment banking courses with job interviews  guarantees approved by India’s prestigious academic institutions.Investment Banking Course
  • Our investment banking course covers complicated securities, derivative instruments, and the trading lifecycles and functions of these assets.

Contact us through chat support, or drive to one of our training centers in Mumbai, Thane, Pune, Chennai, Bengaluru, Delhi, and Gurgaon.