Provides an example of valuing bonds with credit spreads using QuantLib Python. This post walks through an example of shifting the yield term structure.

In an earlier example on pricing fixed rate bonds I demonstrated how to construct and value bonds using the given yield curve. In this example, let us take a look at valuing bonds with credit spreads. We will show how to add credit spreads to the give yield curve using different approaches.

As usual, let us start by importing the QuantLib library and pick a valuation date and set the calculation instance evaluation date.

In [1]:

```
import QuantLib as ql
calc_date = ql.Date(26, 7, 2016)
ql.Settings.instance().evaluationDate = calc_date
```

In [2]:

```
flat_rate = ql.SimpleQuote(0.0015)
rate_handle = ql.QuoteHandle(flat_rate)
day_count = ql.Actual360()
calendar = ql.UnitedStates()
ts_yield = ql.FlatForward(calc_date, rate_handle, day_count)
ts_handle = ql.YieldTermStructureHandle(ts_yield)
```

In [3]:

```
issue_date = ql.Date(15, 7, 2016)
maturity_date = ql.Date(15, 7, 2021)
tenor = ql.Period(ql.Semiannual)
calendar = ql.UnitedStates()
bussiness_convention = ql.Unadjusted
date_generation = ql.DateGeneration.Backward
month_end = False
schedule = ql.Schedule (issue_date, maturity_date,
tenor, calendar,
bussiness_convention,
bussiness_convention,
date_generation,
month_end)
```

In [4]:

```
settlement_days = 2
day_count = ql.Thirty360()
coupon_rate = .03
coupons = [coupon_rate]
# Now lets construct the FixedRateBond
settlement_days = 0
face_value = 100
fixed_rate_bond = ql.FixedRateBond(
settlement_days,
face_value,
schedule,
coupons,
day_count)
```

`fixed_rate_bond`

object, we can create a `DiscountingBondEngine`

and value the bond.

In [5]:

```
bond_engine = ql.DiscountingBondEngine(ts_handle)
fixed_rate_bond.setPricingEngine(bond_engine)
fixed_rate_bond.NPV()
```

Out[5]:

114.18461651948999

`50BP`

spread on top of the treasury yield curve. Now we can, in this case, directly shock the `flat_rate`

used in the yield term structure. Let us see what the value is:

In [6]:

```
flat_rate.setValue(0.0065)
fixed_rate_bond.NPV()
```

Out[6]:

111.5097766266561

`flat_rate`

and since the yield term structure is an `Observer`

observing the `Observable`

`flat_rate`

, we could just shock the rate, and QuantLib behind the scenes recalculates all the `Observer`

s. Though, this approach is not always viable, in cases such as a bootstrapped bond curve. So let us look at two different approaches that can be used. Before we do that, we need to reset the `flat_rate`

back to what it was.

In [7]:

```
flat_rate.setValue(0.0015)
fixed_rate_bond.NPV()
```

Out[7]:

114.18461651948999

The whole yield curve can be shifted up and down, and the bond revalued with the help of the `ZeroSpreadedTermStructure`

. The constructor takes the yield curve and the spread as argument.

In [8]:

```
spread1 = ql.SimpleQuote(0.0050)
spread_handle1 = ql.QuoteHandle(spread1)
ts_spreaded1 = ql.ZeroSpreadedTermStructure(ts_handle, spread_handle1)
ts_spreaded_handle1 = ql.YieldTermStructureHandle(ts_spreaded1)
bond_engine = ql.DiscountingBondEngine(ts_spreaded_handle1)
fixed_rate_bond.setPricingEngine(bond_engine)
# Finally the price
fixed_rate_bond.NPV()
```

Out[8]:

111.50977662665609

`SimpleQuote`

object `spread1`

here.

In [9]:

```
spread1.setValue(0.01)
fixed_rate_bond.NPV()
```

Out[9]:

108.89999943320038

The above method allows only for parallel shift of the yield curve. The `SpreadedLinearZeroInterpolatedTermStructure`

class allows for non parallel shock. First, let us mimic a parallel shift using this class. For the constructor, we need to pass the yield term structure that we wish to shift, and the a list of spreads and a list of the corresponding dates.

In [10]:

```
spread21 = ql.SimpleQuote(0.0050)
spread22 = ql.SimpleQuote(0.0050)
start_date = calc_date
end_date = calendar.advance(start_date, ql.Period(50, ql.Years))
ts_spreaded2 = ql.SpreadedLinearZeroInterpolatedTermStructure(
ts_handle,
[ql.QuoteHandle(spread21), ql.QuoteHandle(spread22)],
[start_date, end_date]
)
ts_spreaded_handle2 = ql.YieldTermStructureHandle(ts_spreaded2)
bond_engine = ql.DiscountingBondEngine(ts_spreaded_handle2)
fixed_rate_bond.setPricingEngine(bond_engine)
# Finally the price
fixed_rate_bond.NPV()
```

Out[10]:

111.50977662665609

Here, once again we can change the value of `spread2`

to value for other shocks.

In [11]:

```
spread21.setValue(0.01)
spread22.setValue(0.01)
fixed_rate_bond.NPV()
```

Out[11]:

108.89999943320038

We can easily do non-parallel shifts just by shocking one end.

In [12]:

```
spread21.setValue(0.005)
spread22.setValue(0.01)
fixed_rate_bond.NPV()
```

Out[12]:

111.25358792334083

`SpreadedLinearZeroInterpolatedTermStructure`

is a very powerful class and can be used to implement key-rate duration calculations.

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I am Goutham Balaraman, and I explore topics in quantitative finance, programming, and data science. You can follow me @gsbalaraman.

Updated posts from this blog and transcripts of Luigi's screencasts on YouTube is compiled into QuantLib Python Cookbook .