216 NATURE OF CAPITAL AND INCOME [Cumar. XIII
The original investment is the discounted value of expected
receipts; the final “returned” principal is simply one (the
largest one) of those receipts. The only difference between
this large receipt and the other smaller ones is that, usually,
it is employed differently when received. It is usually
reinvested in other long-time securities, whereas the smaller
items of income, the so-called “interest,” are spent for articles
of shorter duration, and, thereby, soon converted
into true “final income.” The “principal” and “interest,”
therefore, while both are income with reference to the bond
considered by itself, are apt to lead to different results when
followed into the final transformations of purchase and
sale, by the debit and credit cancellations previously expounded.
If we suppose a five per cent bond to be always
sold on a five per cent basis, and the principal to be always
reinvested in the same kind of security, it is evident, in
relation to the whole series of operations, including the reinvestment,
that the principal, though income, is immediately
canceled by reinvestment as outgo. In other words,
whenever it appears as income from one bond, it
immediately disappears again as outgo for another; consequently
the owner is virtually in possession of a perpetual
annuity of $5 a year. It is with a view to such an
operation that the final payment of $100 on a bond is instinetively
regarded on a different footing from the other
payments called “interest.” It is called “ principal” on
the theory that it is to be reinvested in order to continue
the annuity of $5. It thus in theory represents capital,
whereas the other payments represent only income. But
we see now that both are income received from the bond
as a source of income, although either may, by reinvestment,
be put into capital. That one of them is usually put back
into capital and the other not, is a matter of subsequent
history and does not affect the immediate study of the
bond itself. :
Even when the “principal” received at the maturity of
