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 represents
 nominally a fixed and certain series of income items,
yet, in view of the intention to reinvest, it actually represents
 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 conditions,
 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 prefer,
 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 companies
 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 mortality
 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 temporary
 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.