272 NATURE OF CAPITAL AND INCOME [Caar. XVI

is such as to produce the discount curve BE. = Then the present
 value of AB is FE. But the future valuations of AB
may not follow the line EB as they would were the rate
of interest unchanged. Thus, at a midway point of time,
@, the valuation of AB may be only GD, found by means of
a higher rate of interest involving the steeper discount curve
DB. The history of the value of the property, namely,
the right to AB, therefore follows the broken line ECDB,
abruptly changing from GC to GD, if we suppose G to be

B

 

 

 

 

=>

F G
Fic. 10.

the point at which the rate of interest changes unexpectedly
from one level to the other. Had the owner of the property
foreseen at the start that when the point G' was reached
the rate of interest would be higher, he would have taken
this fact into account in valuing the property at the moment
F, and the value would have been FE’, found by using the
discount curve BDE'. This curve has a slight angle at D,
being composed of the curve BD, constructed according to
the high rate of interest prevailing at the time @, and the
curve DE, constructed according to the lower rate of interest
 which applies to the period FG and which was employed
 in the curve EC. The essential fact, therefore, is
that because of the failure to foresee the future rise in the