Question
I am going to give you $300,000 to invest, with the objective of growing it to $425,000 in 5 years so that you can take
I am going to give you $300,000 to invest, with the objective of growing it to $425,000 in 5 years so that you can take your $125,000 gain and use it as a downpayment towards buying a house. However, the $300,000 is not free you must pay me a fee, which I normally set equal to the yield-to-maturity on the 5-year Treasury scheduled to mature in 2027. That yield is now around 4.21% (up from 1.64% in Spring 2022, up from 1.06% in Fall 2021, up from 0.83% in Spring 2021). Remember that the ytm on a bond is the average annual rate of return you can expect to earn over the life of the bond, if you hold it to maturity (and coupon reinvesting is done properly).
How much $$$ is my fee, if the rate is applied (according to the definition of the ytm) to the initial $300,000 I give to you?
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