How to Answer “Walk me through how you would build a debt schedule (mandatory amortization, optional prepayments, interest).” in Investment Banking Interviews
In investment banking interview prep, this is a high-frequency debt schedule interview question because it reveals whether you can translate credit terms into a clean, auditable model. When an interviewer asks, “Walk me through how you would build a debt schedule (mandatory amortization, optional prepayments, interest),” they want a structured workflow that ties to cash flow, avoids circularity issues, and produces correct interest expense and ending balances.
A strong answer explains the mechanics (opening balance → amortisation → prepayments → ending balance → interest) and calls out the key modelling choices: timing conventions, the cash sweep logic, and how you handle revolvers and PIK features if relevant.
What Interviewers Look For in IB Technical Questions on Debt
This prompt sits at the intersection of modelling accuracy and communication. In ib technical questions, candidates often know the formulas but struggle to articulate an ordered build that would work in a real model.
Interviewers are primarily testing whether you can: (1) read and operationalise debt terms (tenor, amortisation %, optional prepayment rules, margins/floors, commitment fees), (2) link debt cash flows correctly to the three statements, and (3) maintain logical integrity (no negative balances, correct interest base, consistent timing).
They also look for judgement in your debt schedule explanation: when to use average balances for interest, how to treat mandatory vs optional repayments, and how to avoid circular references (or manage them intentionally). A crisp walkthrough signals you can build and audit models under time pressure—one of the core investment banking interview techniques for technical rounds.
Debt Schedule Interview Question: Step-by-Step Build
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Step 1: Set up the debt “terms block” and timeline (inputs first)
I start by setting up a small, clearly labelled inputs/terms section for each tranche: opening balance, interest type (fixed vs floating), base rate + spread, any floor, amortisation profile (e.g., % of original vs % of beginning balance), maturity/balloon, optional prepayment rules (when allowed, minimums, call protection), and fees (OID, commitment fee on revolver undrawn, ticking fees).
Then I align the schedule to the model timeline (monthly/quarterly/annual) and decide a timing convention for cash flows and interest. Most interview cases assume repayments occur at period-end and interest accrues over the period; for cleaner accuracy I’ll compute interest on an average balance (e.g., (opening + ending)/2), but I’ll be explicit and consistent.
Finally, I identify what drives cash available for debt paydown: typically “cash available after operations and required items,” which might be CFO minus capex minus minimum cash, or a defined cash sweep line from the cash flow statement. This sets up the rest of the steps to be mechanical rather than ad hoc.
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Step 2: Build the balance roll-forward with mandatory amortisation
For each tranche, I build a standard roll-forward row structure: Opening Balance → Mandatory Amortisation → Optional Prepayment → Other (issuances/FX/PIK if applicable) → Ending Balance. I calculate mandatory amortisation according to the credit agreement definition.
Common patterns: (a) % of original principal per year (straight-line required amortisation), where the mandatory payment is fixed and the ending balance steps down predictably; or (b) % of beginning balance, where mandatory amortisation declines as the balance declines. If there’s a bullet maturity, mandatory amortisation may be zero until the final period.
I also add basic guardrails: mandatory amortisation can’t exceed the opening balance, and if the tranche hits zero, it stays at zero (no negative debt). This is where I ensure the schedule will not “break” when scenario assumptions change.
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Step 3: Layer in optional prepayments and cash sweep logic (waterfall)
Next I add optional prepayments driven by excess cash. I calculate Excess Cash / Cash Available for Debt Paydown (after required items and any minimum cash balance), then allocate that cash through a defined waterfall.
A typical waterfall is: revolver paydown first (if drawn), then Term Loan A, then Term Loan B, then high-yield notes—unless the case specifies a different order. For each tranche, optional prepayment equals the minimum of (i) remaining cash after prior tranches in the waterfall and (ii) the tranche’s remaining balance after mandatory amortisation (and any restrictions like soft call premiums in early years).
This step is also where circularity can arise because interest affects cash and cash affects paydown. If required, I either (a) use an average balance convention and allow Excel iterative calculation, or (b) break the circle by basing the sweep on cash before interest and then recomputing—stating clearly which approach I’m using. The key is consistency and auditability.
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Step 4: Calculate interest expense (and fees) using the correct balance base
With ending balances in place, I calculate interest for each tranche. For fixed-rate debt: Interest = Rate × Balance × Day-count fraction. For floating-rate debt: Interest = (Base Rate + Spread, subject to floor) × Balance × fraction. The most important modelling choice is the balance base.
In an investment banking debt schedule walkthrough, I’d say I typically use average debt balances for the period: (Opening + Ending)/2, which approximates intra-period repayments. If the model is quarterly and repayments occur at quarter-end, average balance is still a reasonable convention and usually preferred to using ending balance (which would understate interest).
If there’s a revolver, I also compute commitment fees on the undrawn amount and interest on the drawn amount. If there’s PIK interest, I accrue it to the principal (increasing the ending balance) rather than treating it as cash interest. I then link total interest (and any fees) to the income statement and the cash interest portion to the cash flow statement.
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Step 5: Link to the statements and run sanity checks (audit the schedule)
Finally, I connect the debt schedule to the three statements: ending balances feed the balance sheet debt lines; interest expense (cash + non-cash/PIK) feeds the income statement; cash interest and principal repayments flow through financing cash flows; and the cash sweep draws from (or returns to) the cash balance.
Then I run quick checks: (1) no tranche goes negative; (2) optional prepayments never exceed available cash; (3) the waterfall uses cash only once (no double counting); (4) interest behaves directionally—higher debt or higher rates increases interest; (5) mandatory amortisation matches the stated % and reaches the expected maturity/balloon.
If something is off, I trace the schedule like a mini-reconciliation: opening + draws − repayments + PIK = ending. Being able to describe these checks is often what separates a “can model” answer from a memorised one in advanced rounds.
Analyst Model Answer: Debt Schedule Explanation
I’d build a debt schedule as a set of roll-forwards by tranche so it’s easy to audit: opening balance, mandatory amortisation, optional prepayments, ending balance, then interest.
First, I set up a terms block for each tranche—starting principal, whether it’s fixed or floating, base rate and spread with any floor, required amortisation profile, maturity/balloon, and rules around optional prepayments or cash sweep. I align it to the model’s periodicity and choose a consistent timing convention.
Second, I calculate mandatory amortisation based on the credit agreement—either a fixed % of original principal or a % of beginning balance—capped so it can’t exceed the opening balance. That gives me a post-mandatory balance for each tranche.
Third, I calculate excess cash available for paydown and allocate it through a defined waterfall for optional prepayments—typically revolver first, then senior term loans, then notes—using MIN functions so no tranche is prepaid below zero and cash isn’t double-counted. If there’s potential circularity between interest and sweep, I either use an average-balance approach with iteration or I’m explicit about the simplification.
Finally, I compute interest using the correct rate and an appropriate balance base—usually average balance (opening plus ending over two)—and add revolver commitment fees on the undrawn amount if relevant. I link ending debt to the balance sheet, interest expense to the income statement, and cash interest plus principal repayments to financing cash flows, then sanity-check that balances reconcile and interest moves logically with debt and rates.
- Lead with the roll-forward structure: Opening → Mandatory → Optional → Ending → Interest.
- Explicitly name the key inputs: rate mechanics, amortisation definition, optional prepayment rules, fees.
- Call out the cash sweep waterfall and the MIN-based caps to avoid negative debt/cash.
- Show awareness of circularity and offer a clean way to handle it (average balances and/or iteration).
- Close with statement links and fast sanity checks to demonstrate audit mindset.
Common Mistakes in Mandatory Amortisation and Prepayments
- Treating mandatory amortisation and optional prepayments as the same line item, which obscures covenant/term compliance and breaks auditability.
- Calculating interest off ending balance without stating the convention, which can materially understate interest when paydowns happen during the period.
- Letting optional prepayments drive debt negative (or using cash multiple times) because the waterfall isn’t capped with MIN logic.
- Forgetting revolver mechanics (drawn vs undrawn, commitment fees) or mixing revolver paydown with term loan paydown without an order.
- Ignoring circularity between interest expense and cash sweep, leading to unstable models or inconsistent results across scenarios.
- Not linking the schedule cleanly to the financial statements, so the debt schedule becomes a stand-alone table rather than a driver of the model.
Likely Follow-Ups on Interest, Cash Sweep, and Waterfalls
How do you handle circularity between interest expense and cash available for prepayments?
I either enable iteration and compute interest on average balances, or I define sweep cash as pre-interest and then calculate interest consistently off that convention; the key is to document and keep it stable.
Do you compute mandatory amortisation as a % of original or a % of beginning balance?
It depends on the credit terms; many schedules use % of original principal with a fixed annual amount, but some are % of beginning balance—so I model exactly what the agreement specifies.
Where do you place the revolver in the optional prepayment waterfall and why?
Usually first, because it’s typically the most flexible and often cheapest senior liquidity; paying it down also reduces commitment fee/interest exposure in future periods.
How do you model PIK interest versus cash interest?
Cash interest goes to the income statement and reduces cash on the cash flow statement; PIK interest increases the debt principal (non-cash) and compounds into future interest.
What quick checks do you run to ensure the debt schedule is correct?
No negative balances, repayment lines capped by available cash, opening-to-ending reconciliation by tranche, and interest that moves correctly with rates and average debt.
Investment Banking Interview Techniques to Practise This Prompt
- Practise a 2–3 minute “investment banking debt schedule walkthrough” out loud: terms → roll-forward → sweep → interest → links/checks.
- Build a tiny two-tranche example (term loan + revolver) and force yourself to model mandatory amortisation and optional prepayments explained via a clear waterfall.
- Memorise three modelling conventions to state quickly: period timing (end-of-period), interest base (average balance), and circularity handling (iteration or defined simplification).
- When drilling steps to create a debt schedule in ib, always finish with two links (interest to IS, repayments to CFS) and two sanity checks (no negatives, reconciliation).
- Use AceTheRound to rehearse under timed pressure and get feedback on structure, clarity, and whether your explanation is actually implementable in Excel.
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