Answers are entered in the yellow-shaded areas.

Target cells are integrated as amber-shaded areas

Illustration: Goal Seek and Solver

Goal Seek

Simple Case

A B = C
2 0

Problem: Find the value of A for which C = 10.

We call C the "target cell", and should contain a formula. We want this cell to be = 10.
A is the cell that needs to be changed until the desired value for the target cell is obtained.

Application to pricing: One cash flow

P FV y
100 100

Problem: 1-year zero coupon bond with a Face Value of $100, today's Price = $94. Find the yield.
Price = Present Value of the future cash flow (face value), that is, the cash flow discounted by the yield:

FV
P
1 y

In this case, the target cell is P, containing the above formula. We want it to be = 94.
A is the cell that needs to be changed until the desired value for the target cell is obtained.

Alternative setup: define a "Gap" cell that should be driven to zero

Gap = P obtained from formula - P Target Value we've solved for y when Gap = 0

P FV y
100 100

P Gap
94 6.00

Application to pricing: More than one cash flow

Problem: 2-year coupon bond, pays 3% annually, with a Face Value of $100. Today's Price = $96. Find the y
Price = Present Value of the future cash flows (coupon payments + face value), that is, the cash flows discou

c FV c
P
1 y 1 y 2
 c FV c
P
1 y 1 y 2

P c FV + c y
106.0 3 103

P Gap
96 10.00
 l is obtained.

= $94. Find the yield.

w discounted by the yield:

l is obtained.

en to zero

Today's Price = $96. Find the yield.

), that is, the cash flows discounted by the yield:
Answers are entered in the yellow-shaded areas.
Target cells are integrated as amber-shaded areas
Illustration: Goal Seek and Solver

Solver

Can be used for a Goal Seek Problem (set an target value for a cell):

Problem: 2-year coupon bond, pays 3% annually, with a Face Value of $100. Today's Price = $96. Find the y
Price = Present Value of the future cash flows (coupon payments + face value), that is, the cash flows discou

c FV c
P
1 y 1 y 2

P c FV + c y
106.0 3 103

P Gap
96 10.00

But more powerful/versatile: maximization

Problem: Maximize a function: find the y that maximizes the value of z:

z y 2 y2 4

z y
4.00 1 -2 4

Can solve for more than one cell (imposing constraints).

Problem: Minimize a function: find the y1, y2 that minimizes the value of z:

z 4 y1 5 y2 4 5 y1 y2
2 2

y1 y2 1
z
15.25 4 5

y1 y2
0.50 0.50
Alternative setup, avoiding one constraint.

15.25 4 5

y1 y2
0.50 0.50
or a cell):

day's Price = $96. Find the yield.

that is, the cash flows discounted by the yield: