c investment banking job interview questions and answers
 Errata: Known Errors in "Heard on The Street"

7th Edition (Edition 2001) ISBN: 0-9700552-0-X

• Statistics Answer 5.1.18 on page 235. Cdf is not F(p|H)=p^3/[p^3 + (1-p^2)(1-p)], but rather simply F(p|H)=p^2. This is corrected in the 8th Edition.
• I state incorrectly in two places that S(t)N(d1)=exp[-r(T-t)]E[S(T)|S(T)>X], where S(T) is stock price at option expiration, X is strike, and t is now. In fact, assuming dS(t)=rS(t)dt+sigmaS(t)dw in the risk neutral world, then the result should be S(t)N(d1)=exp[-r(T-t)]E[S(T)|S(T)>X]N(d2). The N(d2) is missing.
• Norbert Wiener's name is mis-spelled in several places as Weiner.
• The disks on poles question. Answer 2.29. Last three digits of V(64) should be 615, not 616.

8th Edition (Edition 2003) ISBN: 0-9700552-1-8

• I state incorrectly in two places that S(t)N(d1)=exp[-r(T-t)]E[S(T)|S(T)>X], where S(T) is stock price at option expiration, X is strike, and t is now. In fact, assuming dS(t)=rS(t)dt+sigmaS(t)dw in the risk neutral world, then the result should be S(t)N(d1)=exp[-r(T-t)]E[S(T)|S(T)>X]N(d2). The N(d2) is missing.
• Norbert Wiener's name is mis-spelled in several places as Weiner.
• The disks on poles question. Answer 2.29. Last three digits of V(64) should be 615, not 616.

9th Edition (Edition 2004) ISBN: 0-9700552-3-4.

These are all minor, and do not affect the answers.
• p5, line 19, "...so that I can you ask..." should be "...so that I can ask you..."
• p6, line 11, "Macaulay duration, and the curvature of the plot cannot" should be "negative Macaulay duration, and the curvature of the plot cannot".
• p10, line 9 ...Sincerely, YT. should be ...Sincerely, YT."
• Q1.6 pp12/13. The interviewer just wanted you to answer this in expectational terms, sitting at t=0, not to derive the stochastic process of the random walk in p(t).
• p88, where I say four choose 2 is 4!/(2! x (4-2!))=12, it should say 4x3=12. There are thus 12x4x2=96 different solutions different solutions.
• p75, Answer 1.14, Where I say "Place 10 potentially heavy coins and 10 potentially light coins on each side of the scales, while holding out 10 potentially heavy coins and 10 potentially light coins" I should say "Set aside 10 potentially heavy coins and 10 potentially light coins. Take the remaining 20 potentially heavy and 20 potentially light coins and swap 10 of them from one side of the scales with 10 of them from the other side of the scales, keeping track of which were swapped and which stayed put"
• p79, Footnote 12, should read "|f'(z_0)|<=1/r sup..." rather than 1/r^2.
• p93, let me emphasize that P(X=0)=(1-(1/N))^N requires that N be infinitely large; it is an approximation only for N less than infinity. This is implicitly stated, but I should have been more explicit.
• p95, last three digits of V(64) should be 615, not 616.
• p162, m=(r+(1/2)sigma^2)*(alpha-1) should read m=(r+(alpha/2)sigma^2)*(alpha-1). Same problem a couple of pages later.
• pp218-219, my solution to the sports betting problem assumes a very simple problem statement. Most firms are asking a more complicated question that requires you to bet a positive amount on every game (until someone wins the series) and lock in either a sure doubling of your money or a sure loss of 100%. This solution can be worked out by backward induction to arrive at an initial bet of \$31.25 on your team.
• Minor typos: p3 "questions-." should be "questions."; p9 "fuacet" should be "faucet"; p138 "Wirh" should be "With"; p10 ending quote marks missing after "Sincerely, YT."; p247 citation 114 (Lorenz), Jou-rnal should be Journal.

eBook version of 9th Edition (Edition 2004) Parent ISBN: 0-9700552-3-4, eBook ISBN: B0001DLM26.

Most are minor, and do not affect the answers.
• p5, line 19, "...so that I can you ask..." should be "...so that I can ask you..."
• p6, line 11, "Macaulay duration, and the curvature of the plot cannot" should be "negative Macaulay duration, and the curvature of the plot cannot".
• p10, line 9 ...Sincerely, YT. should be ...Sincerely, YT."
• Question 1.17 need slight clarification. It should say "Each of the lily pads is one square foot in area."
• p69, Answer 1.14, Where I say "Place 10 potentially heavy coins and 10 potentially light coins on each side of the scales, while holding out 10 potentially heavy coins and 10 potentially light coins" I should say "Set aside 10 potentially heavy coins and 10 potentially light coins. Take the remaining 20 potentially heavy and 20 potentially light coins and swap 10 of them from one side of the scales with 10 of them from the other side of the scales, keeping track of which were swapped and which stayed put"
• Appendix A, Footnote 12, should read "|f'(z_0)|<=1/r sup..." rather than 1/r^2.
• p88, where I say four choose 2 is 4!/(2! x (4-2!))=12, it should say 4x3=12. There are thus 12x4x2=96 different solutions different solutions.
• p87, let me emphasize that P(X=0)=(1-(1/N))^N requires that N be infinitely large; it is an approximation only for N less than infinity. This is implicitly stated, but I should have been more explicit.
• p89, last three digits of V(64) should be 615, not 616.
• Answer 2.18 has a simple error in it (which has been there for 10 years and 10 editions!). This answer discusses the plots in Figure B.4. The plots are correct, but the text that discusses the middle plot (c(t) versus F) is not correct. You can see in the middle plot that the dashed line rising from the strike price has slope slightly less than 1 (compare it to the top plot to see this). The accompanying text incorrectly says that it has slope=1. In fact, the slope is exp[-r(T-t)] which gets close to one as maturity approaches, but which is strictly less than one (as in the plot) at any prior time. There are different ways to see this, but I like to look at (partial c/partial F) using the chain rule. It is (partial c/partial S)*(partial S/partial F). The first is the delta which goes to 1 when F and S are large; the second is just exp[-r(T-t)].
• p159, m=(r+(1/2)sigma^2)*(alpha-1) should read m=(r+(alpha/2)sigma^2)*(alpha-1). Same problem a couple of pages later.
• pp212-213, my solution to the sports betting problem assumes a very simple problem statement. Most firms are asking a more complicated question that requires you to bet a positive amount on every game (until someone wins the series) and lock in either a sure doubling of your money or a sure loss of 100%. This solution can be worked out by backward induction to arrive at an initial bet of \$31.25 on your team.
• Minor typos: p3 "questions-." should be "questions."; p9 "fuacet" should be "faucet"; p132 "Wirh" should be "With"; p10 ending quote marks missing after "Sincerely, YT."; p241 citation 114 (Lorenz), Jou-rnal should be Journal.

10th Edition (Edition 2007) ISBN: 0-9700552-5-0.

• Typo: Page 8, 10 lines from bottom, "women" should be "woman"
• Question 1.17 needs slight clarification. It should say "Each of the lily pads is one square foot in area."
• p85, Answer 1.24 where I say four choose 2 is 4!/(2! x (4-2!))=6, it should say 4x3=12. There are thus 12x4x2=96 different solutions different solutions not 6x4x2=48.
• Answer 1.54 has a typo in it. The denominator "(10-5!)" should read "(10-5)!"
• Answer 1.59 is numerically correct, but the logic is wrong. Yes, the probability equals 0.25, but no, the distribution of L is not uniform. Here is one example of how you might work it out: Duke Math Web Page, but I have a simpler argument that I will give for the next edition of the book. Note that one candidate was asked the expected length of the shortest portion of stick in a recent interview (the answer is 1/9, but you need to derive the density to see that; the density for the shortest portion of stick is f_S(s)=-18s+6 for 0<=s<=(1/3)).
• Typo, p103, in Answer 1.37. Eight lines down from top of page, "n>=3" should be "n>=75"
• Answer 2.18 has a simple error in it (which has been there for 10 years and 10 editions!). This answer discusses the plots in Figure B.4. The plots are correct, but the text that discusses the middle plot (c(t) versus F) is not correct. You can see in the middle plot that the dashed line rising from the strike price has slope slightly less than 1 (compare it to the top plot to see this). The accompanying text incorrectly says that it has slope=1. In fact, the slope is exp[-r(T-t)] which gets close to one as maturity approaches, but which is strictly less than one (as in the plot) at any prior time. There are different ways to see this, but I like to look at (partial c/partial F) using the chain rule. It is (partial c/partial S)*(partial S/partial F). The first is the delta which goes to 1 when F and S are large; the second is just exp[-r(T-t)].
• Answer 3.19. p212 of hard copy. Last line. A factor of 2 is missing. The second derivative is actually 2 times what I state, and thus it is 0.14, not 0.07. The qualitative answer (it is a minimum) remains unchanged.
• Typo, p227, top of page. 0x0.50 should read 0x0.30. This does not change the final anwser.
• Answer 4.24 (20,000 placed into five funds) is not correct. Many of my "different" outcomes are indistinguishable from each other. In fact, they are not different and the answer is wrong. Correct answer is the same as the number of distinct outcomes (i.e., the size of the sample space) in a multinomial distribution with 20 trials and five types of outcomes (remember the multinomial is a generalization of the binomial). This is (N+k-1)CHOOSE(k-1), that is (N+k-1)!/((k-1)!*N!). It gives 10,626 in case N=20, k=5. In the simple case N=20, k=2, it gives 21, which makes sense. Alternatively, use a stars and bars approach to come to the same answer. This *****|********||*******| has 20 stars and four bars to indicate an allocation of 5,8,0,7,0. So, the answer must be (24)choose(4).
• Question 4.25 (the cookie dough question). The given solution is an extremely good approximation to the correct answer when there are many cookies and many chips (it is out by at most 1 chip). I assume independence between the event that one cookie has at least one chip and the event that another cookie has at least one chip. In fact, there is very small dependence. There are two exact solutions: one uses a recursion algorithm, the other uses the inclusion-exclusion formula and some combinatorics.

11th Edition (Edition 2008) ISBN: 0-9700552-6-9.

• p83, Answer 1.24 where I say four choose 2 is 4!/(2! x (4-2!))=6, it should say 4x3=12. There are thus 12x4x2=96 different solutions different solutions not 6x4x2=48.
• Typo, p101, in Answer 1.37. Eight lines down from top of page, "n>=3" should be "n>=75"
• Typo, p115, middle of page. A minus sign is missing from in front of the "a" on the LEFT hand side of the equality.
• Typo, p225, top of page. 0x0.50 should read 0x0.30. This does not change the final anwser.
• Answer 4.24 (20,000 placed into five funds) Alternatively, use a stars and bars approach to come to the same answer. This *****|********||*******| has 20 stars and four bars to indicate an allocation of 5,8,0,7,0. So, the answer must be (24)choose(4).
• Question 4.25 (the cookie dough question). The given solution is an extremely good approximation to the correct answer when there are many cookies and many chips (it is out by at most 1 chip). I assume independence between the event that one cookie has at least one chip and the event that another cookie has at least one chip. In fact, there is very small dependence. There are two exact solutions: one uses a recursion algorithm, the other uses the inclusion-exclusion formula and some combinatorics.

12th Edition (July 2009) ISBN: 0-9700552-7-7.

• Posted Sept 3, 2009: Question 1.16 about the ants is mis-stated. In the original question the ants can only walk parallel to the edge of the ruler. As such, they can only ever meet head on. With this amendment, the given answer is correct. Thank you to Craig Smith for finding this.
• Posted May 20, 2010: Answer 4.5 on page 191 says that 8/3 is the same as 2 1/3. Obviously 8/3 = 2 2/3.
• Posted November 24, 2010: Question 4.10 on page 37 is not worded quite clearly enough. There are multiple interpretations. My interpretation is that the game could be played repeatedly where the guest reveals a door to be empty.

13th Edition (July 2012) ISBN: 0-9700552-8-5.

• Posted July 24, 2012: Answer 1.6 on page 59 should say 15 plusminus 10 = 5, or 25. These correspond to S=10, or S=50. The case S=10 has a physical interpretation where the 5x10 box touches the circle on the other side of the square, but that is not consistent with the picture.

15th Edition (August 2014) ISBN: 978-0-9941038-6-4.

• Posted January 23, 2015. In the third solution to the 90-coin problem (Q1.18 of the 15th edition, but appearing in earlier editions also), I mistakenly overlooked a case. In the case where A and B do not balance, and I swap the {27}s, it is possible that the scales tilt the opposite way. In this case, {27}B contains the coin known to be heavy or known to be light. Similarly if you go to the next step and swap {9}s.

16th Edition (September 2015) ISBN: 978-0-9941182-5-7.

• Posted October 7, 2015. Middle of page 97 "k=2,...n" should be "k=1,...,n". Page 98, "tirangle" should be "triangle."
• Posted October 16, 2015. Question 1.69 on p22. An "even number of heads" is what the interviewer wrote, but that is ambiguous (it is not about odd versus even). What he meant was "the same number of heads"
• Posted December 4, 2016. Answer 4.1 p199. First two equations should use x instead of v.
• Posted December 4, 2016. Last line p.226 "to rare" should be "too rare"
• Posted December 4, 2016. p.255 Peijnenburg and Atkinson 2013 is accidentally indented in the references. It is there but easy to miss.
• Posted April 6, 2016. p.20 Q1.59 "three men and one women" should be "three men and one woman"

• None yet.

18th Edition (July 2017) ISBN: 978-0-9941386-4-4.

• "Descartes' Rule of Signs" is spelled incorrectly as "Descarte's Rule of Signs" in three places (pp. 128, 130, 302).
• There is a typo on page 229. The equation on the last line should read "E(Nt) = pt · 1 + (1 − pt) · [1+E(Nt)]." The answer is otherwise correct.

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