Happy Bobby Bonilla Day! On July 1 of every year, baseball fans everywhere celebrate Bobby Bonilla...
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Happy Bobby Bonilla Day! On July 1 of every year, baseball fans everywhere celebrate Bobby Bonilla Day, named after the New York Mets player that secured himself a unique contract in 2000. The Mets, looking to open up space on their payroll, offered to buy-out Bonilla's $5.9 million contract in 2000. In return, the team agreed to pay him annual payments of $1,193,248.20 for 25 years, starting in 10 years, with a negotiated interest rate of 8% (side note: the Mets had significant investments at the time with Bernie Madoff and believed they could consistently earn returns greater than 8%). His payments started on July 1, 2011 and will continue for 25 years until July 1, 2035, when Bobby receives his last annuity check from the Mets at the age of 72. a) Show the calculation that proves Bobby's nearly $1.2m annual payment is equal to his $5.9m contract in 2000. b) Average annual return in the US stock market from the period 2000 to 2020 was approximately 9%. Using this return instead of the negotiated 8% interest, what is the value of Bonilla's deferred payment plan in 2000? Are the Mets or Bobby better off under this new assumption? c) While the stock market may have returned an average of 9% during that time period, stock market returns are highly volatile while Bobby's deferred payment plan is contractual and fixed. Comment on whether the 8% interest rate is an appropriate rate to be used in the calculation. What is the present value of the contract in 2000 using a 3% discount rate? Happy Bobby Bonilla Day! On July 1 of every year, baseball fans everywhere celebrate Bobby Bonilla Day, named after the New York Mets player that secured himself a unique contract in 2000. The Mets, looking to open up space on their payroll, offered to buy-out Bonilla's $5.9 million contract in 2000. In return, the team agreed to pay him annual payments of $1,193,248.20 for 25 years, starting in 10 years, with a negotiated interest rate of 8% (side note: the Mets had significant investments at the time with Bernie Madoff and believed they could consistently earn returns greater than 8%). His payments started on July 1, 2011 and will continue for 25 years until July 1, 2035, when Bobby receives his last annuity check from the Mets at the age of 72. a) Show the calculation that proves Bobby's nearly $1.2m annual payment is equal to his $5.9m contract in 2000. b) Average annual return in the US stock market from the period 2000 to 2020 was approximately 9%. Using this return instead of the negotiated 8% interest, what is the value of Bonilla's deferred payment plan in 2000? Are the Mets or Bobby better off under this new assumption? c) While the stock market may have returned an average of 9% during that time period, stock market returns are highly volatile while Bobby's deferred payment plan is contractual and fixed. Comment on whether the 8% interest rate is an appropriate rate to be used in the calculation. What is the present value of the contract in 2000 using a 3% discount rate?
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Answer a To prove that Bobbys nearly 12 million annual payment is equal to his 59 million contract in 2000 we need to calculate the present value of t... View the full answer
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