From the course: Excel: Financial Modeling with Dynamic Arrays

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Circularity in interest calculations

Circularity in interest calculations - Microsoft Excel Tutorial

From the course: Excel: Financial Modeling with Dynamic Arrays

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Circularity in interest calculations

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- [Instructor] In financial models, circularity appears most often when you are calculating the interest in your financial statements. The loans that you calculate in the debt schedule drives the interest, which drives the profit on the income statement, which in turn drives the cash flow, which drives borrowing, which drives interest, and so on, which, of course, creates a circular reference in the model, which can be rather difficult to manage. There are a few options for avoiding this issue. You can get around it mathematically, perhaps by creating a separate working line, if you can manage it, but it's not always entirely accurate. You can hard-code the interest amount, and then create a macro to recalculate. Now, this will work and be reasonably accurate, but I'd prefer not to introduce macros or VBA into a model at this stage, unless it's absolutely necessary. Or you could enable iterative calculations, of course, which is an option, but we've talked about some of the issues it…

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