If a company repays \$20,000 of principal annually on a \$200,000 loan with a 5% interest rate, how does this affect the interest expense in the fourth year?

• A. Interest expense decreases because the principal outstanding is reduced.
• B. Interest expense increases because the loan term is reduced.
• C. Interest expense remains the same as the first year.
• D. Interest expense is unaffected by principal repayments.

Answer: (A)