The nature of capital and income

Bibliographic data

Monograph

Identifikator:: 102659555X

URN:: urn:nbn:de:zbw-retromon-82920

Document type:: Monograph

Author:: Fisher, Irving http://d-nb.info/gnd/118533541

Title:: The nature of capital and income

Place of publication:: New York

Publisher:: The Macmillan Company

Year of publication:: 1923

Scope:: XXI, 427 Seiten

Digitisation:: 2019

Collection:: Economics Books

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Document type:: Monograph

Structure type:: Chapter

Title:: Part III. Capital and income

Collection:: Economics Books

274 NATURE OF CAPITAL AND INCOME [CHar. XVI ing the second 25 years. In order to forecast what income will be received in the second period, he has to forecast the rate of interest. In other words, although the bond repre- sents nominally a fixed and certain series of income items, yet, in view of the intention to reinvest, it actually repre- sents an income which is quite uncertain after 25 years, because of the uncertainty in the future rate of interest. Such an investor, if he expected the rate of interest at the end of 25 years to be 2 per cent, would, in purchasing the above-mentioned bond, be getting $5 a year for 25 years and $2 a year for the next 25 years. Under these condi- tions, if he could buy a 50-year bond at 4 per cent, he would prefer to do so. But, if he expected the rate of interest to remain, for each 25-year period, at 5 per cent, he would pre- fer, rather than invest now in a 50-year bond at 4 per cent, to invest in the 25-year bond at 5 per cent, intending to reinvest at 5 per cent at the expiration of the term. His forecast of what the rate of interest will be in 25 years will thus materially affect the choice of his investments to-day. Those who expect the rate of interest to fall will prefer to invest in long-time securities at the present market rates, even when those rates are less than on securities of shorter time, while those who expect the rate of interest to rise will prefer short-time securities. In the case of insurance com- panies which are constantly reinvesting, a change in the rate of interest becomes a very serious matter. One of the actuaries of a large company has recently pointed out that such changes in the rate of interest are not uncommonly encountered and are more important for the prosperity of the company than the most unusual changes in the mor- tality tables. Insurance companies can only roughly take account of the chances, reckoning that the greater the likelihood of a rise, the better the policy of making tem- porary investments at high rates; and the greater the likelihood of a fall, the better the policy of making permanent investments, even at moderately low rates.

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