From the course: Financial Modeling Foundations

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Interest rate assumptions in models

Interest rate assumptions in models

From the course: Financial Modeling Foundations

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Interest rate assumptions in models

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- [Instructor] Interest rates play a crucial role in many financial models. Let's take a look at an example. I'm in the 06_01_Begin Excel file. Now, in this case, we're going through and we're trying to model the outcome of an investment decision, but one of the key variables we have to consider here is our interest rate. We've set in an 8% interest rate. And you can see this interest rate will affect our net income if we go through and change that, and we can use the Trace Dependents tool to kind of see where that comes from, right? Because we've added in not only a base interest rate but also the expected rate of change going forward. And so you can see this flows through down here. It's our interest rate on our debt, and essentially, we start with an interest rate. We know what that is based on current conditions. What we don't know is what that interest rate will be going forward. Nobody knows with certainty.…

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