INCOME AND CAPITAL

The value of a note is always the discounted value of thefuture payment to which it entitles the holder.

Elaborate mathematical tables have been calculatedand are used by brokers for informing their customerswhat price should be paid for a five per cent bond inorder that the purchaser may realize 5 per cent, 4 percent, or any other rate of interest on the prices to be paid.The price of the bond is calculated from two items, therate of interest to be realized and the series of sumsor other benefits which the bond is going to return to theinvestor. Aside from risk, there can never be any otherfactors in the calculation except these two. Of course, aninvestor may refuse to buy a bond at the market pricebecause he has, as an alternative, the opportunity tobuy another bond cheaper so that he can realize a higherrate on his purchase price. But that fact does not alterthe principle that market prices represent discountedbenefits. The only market effect of this man’s refusalwill be a slight tendency to lower the market price ofthe first bond and raise that of its rival, that is, to alterthe rate of interest realized. Later we shall study morefully the effects of such alternative opportunities. Herewe are concerned only to note that the price of the bondis dependent solely on two factors: (1) its benefits and(2) the interest rate by which these are discounted.

The principle is, of course, not confined to bonds. Itapplies in any market to all property and wealth—stocks,land (which has a discounted capital value just as trulyas any other capital), buildings, machinery, or anythingwhatsoever. Risk aside, each has a market value depen-dent solely on the same two factors, the benefits, 5 or re-

“ Including, of course, all benefits or services whatever from the pos-session of the wealth such as the option to subscribe to stock, now often

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