Sec. 4] THE RISK ELEMENT 273

rate of interest, the value of the property is FE, instead of
FE’, and that the value of the capital will fall, as at CD,
or it may be rise, in accordance with successive future adjustments
 in the rate of interest. Since these readjustments
 are usually small and gradual, fluctuations in the
capital-value will not ordinarily be as great or as abrupt
as here represented, but the principle involved will still
hold true. We see, therefore, a new cause for the
fluctuations in capital-value, namely, unforeseen changes
in the rate of interest.

§ 4
There is, however, a more fundamental way mn which a
change in the rate of interest enters into our calculations,
for it will affect the magnitude of the future income items
themselves. In the above example it was assumed that
the income items were not dependent on the rate of interest.
But it often happens that the income items are not elements
of what in Chapter VIII we called “final income,” but are
“interactions”; or, in more practical language, it often
happens that the income is to be reinvested. In this case
such an item cancels itself out and leaves in its place a
series of income items in the future, and the magnitude of
the income items in this later series will depend on the rate
of interest at which the preliminary “interaction” was reinvested.
 If the intention in advance is to reinvest, it
becomes important not simply to know the present rate
of interest, but to forecast the future rate. This enters
into the calculations of an investor who holds a 25-year
bond at 5 per cent. He will usually regard the final payment
 as “principal,” intending that when it becomes due
it shall be reinvested in a similar 25-year bond. He, therefore,
 is not really buying a 25-year income stream of $5
a year plus $100 at the end of the term, but is buying, let
us say, a 50-year income stream consisting of $5 per year
for the first 25 years and an unknown amount per year dur->



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