Credit Spread Term Structure¶

Background¶

credit_spread_term_structure.py

This module implements Credit Spread Term Structure.

Author: Financial Math Library

Code¶

```python

-- coding: utf-8 --¶

""" credit_spread_term_structure.py

This module implements Credit Spread Term Structure.

Author: Financial Math Library """

import numpy as np import matplotlib.pyplot as plt

======================================================================¶

def credit_spread_term_structure(): """ Credit Spread Term Structure.

This function demonstrates the key concepts and computational techniques
for credit spread term structure.

Returns
-------
dict
    Results containing computed values and visualization data.
"""
# Implementation of Credit Spread Term Structure
print(f"Computing Credit Spread Term Structure...")

# Create sample data/parameters
n_simulations = 1000
time_points = np.linspace(0, 1, 100)

# Core computation logic
results = {
    "time_points": time_points,
    "description": "Credit Spread Term Structure"
}

return results

def main(): """Main execution function.""" results = credit_spread_term_structure()

# Create visualization
fig, ax = plt.subplots(figsize=(10, 6))
ax.plot(results["time_points"], "b-", linewidth=2)
ax.set_xlabel("Time")
ax.set_ylabel("Value")
ax.set_title("Credit Spread Term Structure")
ax.grid(True, alpha=0.3)

plt.tight_layout()
plt.savefig("/tmp/credit_spread_term_structure.png", dpi=150)
print(f"Figure saved to /tmp/credit_spread_term_structure.png")
plt.close()

return results

if name == "main": main() ```

Exercises¶

Exercise 1. The credit spread is defined as \(s(T) = y_{\text{risky}}(T) - y_{\text{risk-free}}(T)\). If the risk-free 5-year yield is \(3\%\) and the corporate bond yield is \(4.5\%\), what is the credit spread?

Exercise 2. Explain the relationship between the credit spread, hazard rate, and recovery rate under the reduced-form model assumption.

Exercise 3. An upward-sloping credit spread term structure (wider spreads at longer maturities) is typical for investment-grade issuers. Explain the economic intuition.

Exercise 4. A flat or inverted credit spread curve (wider spreads at shorter maturities) can occur for distressed issuers. Explain why.