Wednesday, July 4, 2018

Math in the news
Every July 1 there will be something in the news on the New York Mets paying retired baseball player Bobby Bonilla $1.9 million per year, even though he last played for the Mets in 1999.

The Mets released him in 1999, but they still owed him $5.9 million in 2000 for the last year of a 5-year contract. The Mets and his agent negotiated a deal where the Mets would pay him 25 deferred payments of $1,193,248 per year starting in 2011 and ending in 2035. This was calculated at an 8% interest rate. The Mets were willing to do this because they thought they were earning 12% to 15% on investments with Bernie Madoff which turned out to be fictional.

From Bonilla’s viewpoint these 25 payments of $1,193,248 per year, deferred 10 years from 2001, has a present value equal to the $5.9 million he otherwise was due: (1/1.08^10) * 1193248 * (1 - 1.08^-25)/.08 equals 5.9 million, so at 8% interest this was a fair deal for him. At today’s low interest rates, 8% looks pretty high. From the Mets’ viewpoint, even if they only earned 10%, the present value is $4.2 million, which is lower than the $5.9 million they originally owed him. Of course the Mets did not earn 10% on their Madoff investment.

These formulas appear in many math and finance textbooks under the subject of math and finance. Accountants were no doubt involved in the negotiations. I just want to suggest that math and accounting are sometimes in the news.