Chartered Financial Analyst Level 2 test

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CFA Level 2 - Fixed Income - The Term Structure and Interest Rate Dynamics

Intermediate

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In a multiple regression model including an interaction term between a categorical variable (with two levels) and a continuous variable, how should the coefficient of the interaction term be interpreted?

The coefficient represents the difference in the slope of the continuous variable between the two levels of the categorical variable.

The coefficient represents the average difference in the dependent variable between the two levels of the categorical variable, regardless of the value of the continuous variable.

The coefficient indicates the change in the dependent variable for a one-unit increase in the continuous variable, holding the categorical variable constant at its reference level.