Yield Curve Deformation Simulator

This project simulates realistic yield curve shape changes and studies how they affect bond prices and interest rate risk measures.

It is designed to connect macroeconomic intuition about interest rates with quantitative fixed-income risk analysis.

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What is a yield curve?

A yield curve shows interest rates for loans of different maturities (short-term to long-term).

Changes in the shape of the yield curve reflect expectations about:

• economic growth
• inflation
• monetary policy
• long-term risk premia

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What this project does

Starting from a base yield curve, the simulator applies four standard curve deformations used in macro and rates analysis:

• Steepener – long-term rates move more than short-term rates
• Flattener – short- and long-term rates converge
• Twist – rates rotate around a middle maturity
• Butterfly – middle maturities move differently from the short and long ends

For each scenario, the project computes:

• Bond price and PnL relative to the base curve
• Effective duration
• DV01 (price sensitivity to a 1bp rate change)
• Convexity
• Key-rate DV01 decomposition

Results are presented as tables and yield curve plots, and exported as CSV files.

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Why this matters

Yield curve movements are central to macroeconomic analysis and fixed-income markets. Different curve shapes imply different risks for bond portfolios.

This project demonstrates how:

• macro expectations translate into curve shape changes, and
• curve shape changes translate into bond price and risk outcomes.

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Project structure

yield-curve-deformation-simulator/ ├── notebook/ # Main analysis and demonstration notebook ├── src/ycdeform/ # Core simulation, pricing, and risk engine ├── reports/ # Generated outputs (CSV tables) ├── data/ # Placeholder for future data (if required) ├── README.md └── pyproject.toml

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How to run

1. Clone the repository
2. Set up a Python environment (Anaconda or pip)
3. Open and run the notebook:

notebook/01_build_core_engine.ipynb

Running the notebook will:

• simulate yield curve scenarios
• compute prices and risk measures
• generate tables and plots
• save outputs to the reports/ folder

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Tools used

• Python
• NumPy
• Pandas
• Matplotlib

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Intended audience

This project is intended for:

• economics and finance students
• macro and fixed-income researchers
• anyone interested in yield curve dynamics and bond risk analysis