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Saturday, November 13, 2010
Bonilla is 47 years old, has been retired since 2001, and hasn’t played for the Mets since 1999, but when they bought out the remaining $5.9 million on his contract in January of 2000 they agreed to defer payment at eight percent interest.
And now it’s time to pay the fiddler.
I know this article is old but I don’t believe it was every discussed here. And, well, it’s hilarious!
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1. Mayor Blomberg Posted: November 13, 2010 at 03:22 PM (#3689339)Good lord, he's one of those identity-changing immortals! Just... not very creative.
Well, he can always sell it to J. G. Wentworth and get (<ahem> most...) of it back now. "It's my money, and I need it NOW!"
And, in case one has missed these threads, there's a Primate with the handle Bobby Bonilla's Annuity (Matt) whose profile states: "Total Comments 13745".
What the heck is that?
EDIT: Teach me to go to the Internet to look up a phrase before commenting on it so I don't make a jackass of myself. Someone else swoops in first.
[edit] is going to go in the dumpster
It's gotta be the latter.
If someone offers to pay you 7% interest for 35 years, you say YES.
The Fed data releases for early January 2000 show that AAA corporate bonds yielded about 7.7% at the time and treasuries of almost all maturities out to 30 years yielded about 6.6% -- there was apparently a pretty large AAA-corporate to treasury spread at the time. (As a technical point, since the interest rate curve was very flat at the time, we can be a bit sloppy about mixing results from different maturities and ignoring the forward-starting nature of the annuity and still arrive at the right answer.)
If the Mets had wanted to pay Bonilla cash in 2000, he could have taken the cash and invested it easily in the market at 7% or more for long-dated AAA bonds and been at least as well off. If Bonilla had wanted cash in 2000, the Mets could have paid him out and taken a $5.9mm loan in the market to finance the payment. From the Fed data, a loan at the time would have probably cost the Mets at least 7%.
The transaction was very fair at the time, and Bonilla only looks smart and the Mets dumb because interest rates happened to go down after 2000. Anyone who used their savings to buy long-dated treasuries or corporate bonds in 2000 made the exact same trade as Bonilla, is just as smart, and made proportionally just as much money. Any company that issued long-dated bonds in 2000 is just as "dumb" as the Mets (I put "dumb" in quotations because as long as they invested the money in long term projects that returned over 7%, the companies made money, and the borrowing made sense).
http://www.federalreserve.gov/releases/h15/20000110/
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