If a company has a high-yield debt and pays no principal, what happens after one year regarding interest expense?

In this scenario, when a company has high-yield debt and it is paying no principal, the interest expense will not decrease over the course of the year; instead, it will likely remain constant. The correct choice indicates that operating income is affected due to interest expense and depreciation, which provides a clearer understanding of how these factors interplay within financial statements.

High-yield debt typically comes with a substantial interest obligation because the debt is considered to be riskier. Therefore, the interest expense from this type of debt remains a significant cost for the company. When the interest is paid, it is accounted for separately from operating income, leading to a decrease in net income but not directly impacting operating income.

Depreciation is based on the allocation of an asset's cost over its useful life, and it is a non-cash expense. On the other hand, the interest expense directly reduces the bottom line by affecting earnings before tax. Hence, while both interest expense and depreciation are subtracted from revenues to calculate operating income, interest expense represents a cash outflow that ultimately reduces the company's operating profit.

The other potential answers do not reflect the complete picture regarding how interest and depreciation affect operating income. The operating income may remain unchanged if it is calculated before the deduction of