THE THEORY OF INTEREST

items in the income stream ready made. Likewise weneglect the problem of foreign exchange; we are study-ing only the problem of interest.

§5. Specifications of Income

In the above schematic picture only two periods of timeare represented. In actual life there are many periods—anindefinite number of them. Theoretically there might bea rate of interest connecting every pair of possible dates.For instance, there might be a rate of interest between thepresent and one year hence, another between one yearhence and two years hence, and so on, all these ratesbeing quotable in today’s markets. In practice no rates areactually quoted except those connecting the present(which, of course, merely means a future date near thepresent) with several more remotely future dates. Arate on a five year contract may be considered as a sortof an average of five theoretically existing rates, one foreach of the five years covered.

Except when the contrary is specifically mentioned, itwill henceforth be understood, for the sake of simplicity,that there is only one rate of interest, the rate of interest,applicable to all time intervals. This may be most con-veniently pictured to mean the rate connecting todaywith one year hence. Even this rate of interest connect-ing two specific dates separated by one year depends on(or, in technical terminology, is a function of) conditionsnot only at these two dates but at many other dates.When it is said that the impatience of an individual de-pends on his future income stream, it is meant that thedegree of his impatience for, say, $100 worth of thisyear’s income over $100 worth of next year’s income de-pends upon the entire character of his expected income

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