Have you been told that interest is circular?
Or that tax is circular?
Or that debt sculpting is circular?
Or that complex models need circular references and therefore iteration is required?
Or that advanced models contain macros to circumvent circularities?
Please do not believe any of these myths. No circular references of any type is ever necessary. What is needed instead is good logic and good algebraic skills.
What is wrong with circular references? Well, circular references usually introduce numerical errors, iterations open the floodgates for further errors and copy paste iterative macros are cumbersome tools which reduce a financial model’s flexibility.
The trouble is that generally people believe those in authority without question. Experiments have been carried out to show this is the case, for example Stanley Milgram’s notorious electric shock experiments at Yale University in the 1960s. Volunteers were asked to administer steadily increasing (and possibly fatal) electric shocks and many did so, despite the screams of pain.
If you have been told any of the above myths by your bosses or on a graduate training programme, then I do not blame you for believing them. But now that you have read this, please think again.
Think about logic and think about crystal balls. If there is one thing that 2020 has taught us, it is that crystal balls do not exist. And circular references do not either.