FRM Part I · FRM Exam Part I · Regression with Multiple Explanatory Variables
A regression of bond spread on leverage (L) and a rating-group dummy D (1 = speculative grade) with an interaction term gives: Spread = 80 + 20*L + 150*D + 35*(L*D). What is the expected change in spread for a one-unit increase in leverage for a speculative-grade issuer?
The expected spread rises by 55 per unit increase in leverage for speculative-grade issuers. The slope is the base leverage coefficient of 20 plus the interaction coefficient of 35. The dummy's own coefficient of 150 changes only the intercept, not the slope.
- A20
- B35
- C55Correct
- D205
Explanation
With D = 1, the slope on L is the base slope plus the interaction coefficient: 20 + 35 = 55. The 150 shifts the intercept only and does not affect the slope. The answer 35 ignores the base slope.
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