2. The ten-year spot rate is 5% and twenty-year spot rate is 4%. Both are annual rates with annual compounding, and are quoted today. (a) If rates are determined according to the expectations hypothesis, what is the ten-year spot rate that the market expects today to prevail in ten years? (b) Suppose that the discrepancy between the ten- and twenty-year spot rates is due not as much to expectations about the ten-year spot rate in ten years, but to unusually strong demand for twenty-year bonds by pension funds. What can you say about the ten-year spot rate that the market expects today to prevail in ten years? (c) If the ten-year spot rate in ten years turns out to be 2.5%, what is your ten-year return from investing in a twentyyear zero-coupon bond? Express this as an annualized return. (d) A hedge fund can trade ten- and twenty-year zero-coupon bonds, and it assumes that the relevant scenario is as in part (b). The hedge fund wants to form a long- short portfolio in the two bonds, i.e., go one bond long and an equal amount (in pounds) short in the other bond. Which bond should it long and which should it short? (c) Suppose that immediately after the portfolio in part (d) is formed, ten- and twenty-year spot rates drop by 0.5%. Does the hedge fund realize a gain or a loss, and why? (f) Compute explicitly the gain or loss in part (e) if each of the long and short positions is 1M