In this workout, we've been told that an investor is valuing a four-year 5% annual coupon bond that's been issued by Food Producing Company. Now, the analyst has assessed the competitive position of the business as part of the four Cs of credit analysis, but she's also noticed several material environmental risks that she believes the company is not managing adequately. The analyst has also established the following. First of all, we've got the settlement date of the bond. That's the 1st of January '22. We've got the maturity date of the bond. That's the 1st of January, 2026. And the par value of the bond, that's the amount payable on redemption, is 100. Now, the analyst has also valued the bond on a risk-free basis. That's the present value of the bond's cash flows discounted at a risk-free rate, and that's 106.2. Now below that, we've got some information about the present value of expected losses on the bond. Now, the present value of expected losses excluding ESG factors is 2.4, whereas the present value of expected losses incorporating ESG factors is 2.9. Now, the important thing to note here is the present value of expected losses is usually calculated using detailed modeling of various scenarios, and this allows the analyst to calculate the expected losses based on the probability of each scenario multiplied by the loss incurred in each scenario. So basically it's a probability weighted loss calculation, and as we would expect, given that these ESG risks are material, the present value of expected losses incorporating those ESG risks is higher than the present value of expected losses when ignoring those ESG risks. Now, this workout asks us to calculate the fair value of the bond and then the implied yield. Now, the fair value of the bond is going to be the risk-free value of the bond adjusted for the present value of expected losses. Now, which present value of expected loss number should we use, or we should use whichever number gives us the best information for assessing valuation? And if we know there are material ESG factors, we should incorporate that into the valuation. So we're gonna calculate the fair value of the bond taking the risk-free valuation, deducting the expected losses incorporating those ESG risks. We can then use that fair value to calculate the implied yield. Now we're gonna use the yield function in Excel for that, and the yield function requires us first of all to input the settlement date. We then input the maturity date in sell C11. We then take the rate. That's the 5% coupon. We then input the price that we've just calculated in sell C19. We then input the redemption value. That's the par value. And finally, the frequency is an annual bond, so I'll denote that with a one at the end of my formula. So that gives us a yield of 4.1% that's implied by that fair value of 3.3. Now let's imagine that the bond is actually trading at 4.1% but another analyst hasn't incorporated the ESG analysis into their bond valuation. So instead, they're coming out with a fair value for their bond of 103.8. That would give an implied yield of 4.0%. So they would be assuming that the bond is undervalued if it's actually trading at a yield of 4.1%. Either yield is too high, and that this may be represents a buying opportunity for the bond. However, remember that they haven't captured all of the risks in their analysis, unlike the analyst that has incorporated ESG risks in their modeling. And this is what we mean when we talk about that the ESG analysis helps us to improve our analysis of risk-adjusted returns, and therefore we have a better understanding of the risks associated with financial instruments, and therefore a better understanding of the appropriate returns that we can expect and a more robust valuation.