Investment banking terms are the language of every technical interview in finance. Miss one definition and the interviewer stops listening. Nail them and you sound like someone who already works on the desk. This glossary covers the core technical concepts tested across IB, PE, equity research, and credit interviews — from valuation frameworks and M&A mechanics to capital structure and return metrics. Browse by category below, and click into individual entries for full deep-dive explanations built around real interview questions.
Valuation Terms
Valuation is the foundation of every modeling round in investment banking, equity research, and private equity. If you can't articulate how a company is valued — and why different methods produce different numbers — you won't make it past a first-round technical screen.
WACC Formula
WACC (Weighted Average Cost of Capital) is the blended rate a company pays to finance its operations across both debt and equity. It's the discount rate used in a DCF to bring future free cash flows back to present value — and one of the most frequently tested finance interview terms.
Treasury Stock Method
The treasury stock method calculates the dilutive impact of in-the-money options, warrants, and convertibles on a company's share count. Interviewers test it because it's the bridge between basic and diluted shares outstanding — a detail that directly affects equity value per share.
Discounted Cash Flow (DCF)
A DCF values a company by projecting its future free cash flows and discounting them back to today using WACC. It's the single most common valuation question in investment banking interviews.
Enterprise Value
Enterprise value represents the total value of a business to all capital providers — equity holders, debt holders, and minority interests — minus cash. Think of it as the theoretical takeover price.
Equity Value
Equity value is the portion of a company's total value that belongs to common shareholders. It equals enterprise value minus net debt and other claims. In public markets, it's market cap.
Comparable Companies Analysis
Comps value a company by comparing its trading multiples (EV/EBITDA, P/E, etc.) to those of similar public companies. It's a relative valuation method — fast to build, but only as good as the peer set you choose.
Precedent Transactions
Precedent transactions value a company based on multiples paid in prior M&A deals for similar businesses. These multiples typically include a control premium, making them higher than trading comps.
Terminal Value
Terminal value captures the value of a business beyond the explicit forecast period in a DCF, typically using either a perpetuity growth method or an exit multiple. It often represents 60–80% of total enterprise value, which is exactly why interviewers probe your assumptions here.
M&A Terms
M&A concepts dominate deal-side IB interviews and come up constantly in PE. If you're targeting an M&A coverage group or any role that touches live transactions, expect detailed questions on deal structure, accounting treatment, and buyer logic.
Purchase Price Allocation
Purchase price allocation (PPA) is the process of assigning the acquisition purchase price to the target's identifiable assets and liabilities at fair value. Whatever's left over after that allocation becomes goodwill on the acquirer's balance sheet.
Goodwill
Goodwill is the premium an acquirer pays above the fair value of a target's net identifiable assets. It sits on the balance sheet as an intangible asset and gets tested for impairment annually — not amortized.
Accretion / Dilution Analysis
Accretion/dilution analysis measures whether an acquisition increases or decreases the acquirer's earnings per share. If post-deal EPS rises, the deal is accretive; if it falls, it's dilutive. This is a staple of investment banking terminology tested in nearly every M&A interview.
Synergies (Cost vs. Revenue)
Synergies are the incremental value created by combining two companies. Cost synergies (headcount reduction, facility consolidation) are more certain and get credited faster than revenue synergies (cross-selling, pricing power), which is why bankers and interviewers treat them differently.
Stock Deal vs. Asset Deal
In a stock deal, the buyer acquires the target's equity (and inherits all liabilities). In an asset deal, the buyer picks specific assets and liabilities. The distinction matters for tax treatment, liability exposure, and how the deal flows through the financial statements.
Strategic Buyer vs. Financial Buyer
A strategic buyer is an operating company acquiring a target for operational synergies. A financial buyer — typically a PE firm — acquires for returns, usually through an LBO. Strategics generally pay higher multiples because they can underwrite synergies that financial buyers can't.
Earnouts
An earnout is a contingent payment tied to the target hitting specific post-close performance milestones. It bridges valuation gaps between buyer and seller when they disagree on a company's future earnings potential.
LBO and Capital Structure Terms
LBO mechanics and capital structure questions are the backbone of PE interviews and show up in leveraged finance and credit roles. Understanding how a deal is financed — and how that financing affects returns — separates serious candidates from those who only studied valuation.
Mezzanine Debt
Mezzanine debt sits between senior secured debt and equity in the capital structure. It carries higher interest rates (often with a PIK component) and sometimes includes equity warrants, compensating the lender for being subordinated to senior tranches.
Leveraged Buyout (LBO)
An LBO is the acquisition of a company using a significant amount of borrowed money, with the target's cash flows and assets serving as collateral. PE firms use LBOs to amplify equity returns through financial engineering and operational improvement.
Term Loan A vs. Term Loan B
Term Loan A (TLA) is typically held by banks, amortizes over the life of the loan, and carries lower spreads. Term Loan B (TLB) is syndicated to institutional investors, has minimal amortization (usually 1% per year), and carries higher spreads. Knowing the difference signals you understand how leveraged deals are actually structured.
Revolver (RCF)
A revolving credit facility works like a corporate credit card — the borrower draws and repays as needed up to a committed limit. In an LBO, the revolver is typically undrawn at close and reserved for working capital needs.
Second Lien Debt
Second lien debt is secured by the same collateral as first lien debt but with a subordinated claim. In a liquidation, first lien holders get paid before second lien. The higher risk translates to higher interest rates.
Sources and Uses
The sources and uses table is the first page of any LBO model. Sources show where the money comes from (debt tranches, equity contribution). Uses show where it goes (purchase price, fees, balance sheet cash). They must balance.
Covenants (Maintenance vs. Incurrence)
Maintenance covenants require the borrower to meet financial tests (e.g., leverage ratio) every quarter. Incurrence covenants only apply when the borrower takes a specific action, like issuing new debt. TLA deals typically have maintenance covenants; TLB deals are often covenant-lite with incurrence tests only.
PIK (Paid-in-Kind Interest)
PIK interest accrues and is added to the loan's principal balance instead of being paid in cash each period. It preserves cash flow for the borrower but increases total debt over time — a tradeoff interviewers will expect you to explain.
Returns and Metrics Terms
Return metrics are tested in every PE interview and any role that evaluates investment performance. You need to know not just the formulas, but when each metric tells a different story — and why an investor would care.
IRR (Internal Rate of Return)
IRR is the annualized rate of return that makes the net present value of all cash flows equal to zero. PE firms use it as a primary performance metric because it accounts for the time value of money — a 2x return in three years is very different from a 2x in seven.
MOIC (Multiple on Invested Capital)
MOIC measures how many times an investor gets their money back, regardless of how long the investment takes. A 3.0x MOIC means $1 invested returned $3. It's simple, intuitive, and always reported alongside IRR.
Cash-on-Cash Return
Cash-on-cash return measures the annual cash income earned on the cash invested. It's most commonly used in real estate and credit investing where periodic cash distributions are the primary return driver, not capital appreciation.
Deleveraging
Deleveraging is the process of paying down debt over the hold period using the portfolio company's free cash flow. In an LBO, deleveraging is one of the three core return drivers alongside EBITDA growth and multiple expansion.
Exit Multiple
The exit multiple is the valuation multiple (typically EV/EBITDA) assumed at the time the PE firm sells the investment. It's one of the most sensitive assumptions in an LBO model — small changes in exit multiple create large swings in IRR.
Accounting Terms
Accounting is the language underneath every model. You can't build a DCF, an LBO, or a merger model if you don't understand how the three financial statements connect. These investment banking terms show up in every interview, regardless of role.
Working Capital
Working capital is current assets minus current liabilities. Changes in working capital affect free cash flow and are a common source of interview questions — especially around how increases in accounts receivable or inventory consume cash even when revenue is growing.
Deferred Tax Liability
A deferred tax liability arises when a company recognizes less tax expense on its income statement than it actually owes, creating a future obligation. The most common cause in an interview context is accelerated depreciation for tax purposes versus straight-line for GAAP.
EBITDA vs. EBIT
EBITDA strips out depreciation and amortization to approximate operating cash flow. EBIT includes D&A and better reflects the ongoing cost of maintaining capital assets. Interviewers will ask when to use each — EBITDA for capital-light businesses, EBIT for asset-heavy ones.
Free Cash Flow (Levered vs. Unlevered)
Unlevered free cash flow is cash available to all capital providers before debt service — it's what you discount in a DCF. Levered free cash flow is what's left after interest and mandatory debt repayment, representing cash available to equity holders only.
Three-Statement Linkage
Three-statement linkage describes how the income statement, balance sheet, and cash flow statement connect. Net income flows into retained earnings and the top of the cash flow statement. Changes in balance sheet items drive working capital adjustments. Interviewers test this because it reveals whether you actually understand how models work, not just how to fill in cells.
Master Investment Banking Terms with Cook'd AI
Knowing the definitions is step one. The gap that kills candidates is the space between reading a term and explaining it clearly under pressure — when an interviewer asks you to walk through a DCF or explain how deleveraging drives returns in an LBO. That's a different skill, and it only comes from practice.
Cook'd AI gives you real technical questions pulled from actual finance interviews, then provides AI feedback on your accuracy, delivery, and tone. Over 1,600 candidates have landed offers at top firms using it. Try Cook'd AI free and find out which investment banking terms you actually know versus which ones you just think you know.
Knowing an investment banking term isn't the same as walking through it under interview pressure. Cook'd AI gives you a real question bank on every concept in this glossary and AI feedback on every answer — technical accuracy, delivery, and tone.
Knowing an investment banking term isn't the same as walking through it under interview pressure. Cook'd AI gives you a real question bank on every concept in this glossary and AI feedback on every answer — technical accuracy, delivery, and tone.
Frequently Asked Questions
How many investment banking terms do I need to know for interviews?
There's no fixed number, but candidates who perform well in technical screens typically have strong command of 40–60 core concepts across valuation, M&A, accounting, and LBO mechanics. Depth matters more than breadth — interviewers will probe follow-up questions on whatever you mention. It's better to deeply understand 30 terms than to loosely memorize 100.
What's the most-tested concept in investment banking interviews?
The discounted cash flow analysis comes up more than anything else, because it touches valuation, accounting, and capital structure in a single framework. Expect to walk through the full methodology: projecting free cash flows, calculating WACC, estimating terminal value, and bridging from enterprise value to equity value per share.
How is this glossary different from Investopedia?
Investopedia gives you textbook definitions written for a general audience. This investment banking dictionary is built specifically for interview prep — every definition is scoped to what interviewers actually test, not what a finance professor would assign. More importantly, Cook'd AI lets you practice answering questions about these terms under timed, realistic conditions with AI coaching on technical accuracy and delivery. Reading definitions doesn't build interview fluency. Reps do.
How do I practice investment banking technical questions before my interview?
Start by reviewing the terms in this glossary, then shift to active practice. Cook'd AI simulates real technical questions from top investment banks, PE firms, and hedge funds, then gives you AI feedback on your answer's accuracy, structure, and delivery. It's more targeted than generic AI tools and far cheaper than a $300/hr coaching session. The candidates who get offers aren't the ones who studied the most — they're the ones who practiced the most.
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