Circular reference

A calculation that depends on itself, which in financial models arises because interest depends on debt, debt depends on the cash shortfall, and the shortfall depends on interest.

Spreadsheets resolve it with iterative calculation, which converges in most cases and occasionally does not, leaving the model unstable and hard to audit.

The alternatives are to use the opening debt balance for the interest calculation, which is transparent and slightly inaccurate, or to break the loop with an explicit switch.

Instability in a model is worse than a small approximation.