What happens to yeast in bread after it dies?
Nothing truly disappears even in thermonuclear reactions and baking bread is not even close to that.

When you bake bread, water evaporates into the atmosphere and the CO2 and other volatiles released by the yeast bacteria dissipate there as well, which means that the solids of the yeast just remain inside the bread.

So you can tell your friend that their statement is untrue. and that with each bite of bread they're eating a graveyard full of dead yeast bodies...  ;-)