Today is my favorite day of the year – it’s a day when you can see the power of compounding and time value of money. Why? It’s because Bobby Bonilla get paid $1.19 even though he hasn’t played baseball in over 20 years!
Bobby Bonilla was one of the killer B’s when I was a kid on the Pirates with Barry Bonds. He then eventually paid for the Met’s.
In 2000, the Met’s bought out Bobby’s contract. Instead of paying him $5.9 million in 2000, they agreed to pay him $1.19 million per year for 25 years starting July 1, 2011. The interest rate? 8%.
How does the math work? Well, $5.9 million grew by 8% with no payouts for 10 years. So the Met’s owed him $12.74 million in 2011 when the payouts started. 25 Payments of $12.74 still earning 8% interest is… $1.19 million. Here you can visually see the payouts.
The interesting part of this story is the Mets were happy to agree to this interest rate and payout structure because of the amazing returns they were getting from … Bernie Madoff.
