Answer :
To find the largest size loan you can afford with a quarterly payment of [tex]$425 for a 13-year loan at an annual interest rate of 3.3%, compounded quarterly, we'll use the following present value annuity formula:
\[ \text{PMT} = P_o \left( \frac{\frac{r}{n}}{1 - \left(1 + \frac{r}{n}\right)^{-nt}} \right) \]
Here, our variables are:
- \(\text{PMT} = 425\) (quarterly loan payment)
- \(r = 0.033\) (annual interest rate)
- \(n = 4\) (compounding periods per year, i.e., quarterly)
- \(t = 13\) (loan duration in years)
First, identify the correct formula for the present value of an ordinary annuity:
\[ P_o = \text{PMT} \left( \frac{1 - \left(1 + \frac{r}{n}\right)^{-nt}}{\frac{r}{n}} \right) \]
Next, let's solve step-by-step:
1. Calculate the rate per period:
\[
\text{rate per period} = \frac{r}{n} = \frac{0.033}{4} = 0.00825
\]
2. Calculate the total number of periods:
\[
\text{total periods} = n \times t = 4 \times 13 = 52
\]
3. Calculate the discount factor:
\[
\text{discount factor} = \left(1 + \frac{r}{n}\right)^{-nt} = \left(1 + 0.00825\right)^{-52} \approx 0.6523069483825145
\]
4. Calculate the present value (largest size loan):
\[
P_o = \text{PMT} \left( \frac{1 - \left(1 + \frac{r}{n}\right)^{-nt}}{\frac{r}{n}} \right)
\]
Substituting the values:
\[
P_o = 425 \left( \frac{1 - 0.6523069483825145}{0.00825} \right) \approx 17911.46
\]
Therefore, the largest size loan you can take is approximately $[/tex]\[tex]$17911.46$[/tex].