A little-known fact is that ex-major league ballplayer Bobby Bonilla is being paid $1.19 million each year from 2011 to 2025 by the Mets. Bonilla was bought out of the remaining $5.9 million in his contract in 2000 for this agreement, an annuity, as it's called in the retirement business or financial community.
How could this be?! It's a great example of the concept of present discounted value. It turns out that the $25 million plus in cash that Bonilla will be paid over the next 25 years is actually less in present value than the $5.9 million he gave up in 2000 as part of the deal. (In my spreadsheet, I find the present value of the contract equalling about $4.9 million in 2000 dollars.)
Or at least the PDV is less if the interest rate they used to strike the deal --- 8% per year --- was realistic. Maybe that was a little high. The interest rate in the contract ought to be the rate of return that Bonilla would have earned on that $5.9 million were he paid it in 2000 and promptly invested it. Of course between 2000 and 2011, stock prices either declined or moved sideways as a result of all the turbulence in the interim. The average Corporate Aaa yield was probably around 6% during this period. Based on what's happened since 2000, Bonilla's deal looks pretty good!
It would be interesting to compare the "price" he paid for the annuity to what else prevails in private markets.
