Charles Rosen relaxes in a plush, overstuffed recliner by thefire, enjoying the final vestiges of his week-long winter va-cation. As a financial analyst working for a large investmentfirm in Germany, Charles has very few occasions to enjoythese private moments, since he is generally catching red-eye flights around the world to evaluate various investmentopportunities. Charles pats the loyal golden retriever lyingat his feet and takes a swig of brandy, enjoying the warmthof the liquid. He sighs and realizes that he must begin at-tending to his own financial matters while he still has thetime during the holiday. He opens a folder placed conspic-uously on the top of a large stack of papers. The folder con-tains information about an investment Charles made whenhe graduated from college four years ago. . . . Charles remembers his graduation day fondly. He ob-tained a degree in business administration and was full ofinvestment ideas that were born while he had been day-dreaming in his numerous finance classes. Charles main-tained a well-paying job throughout college, and he was ableto save a large portion of the college fund that his parentshad invested for him.Upon graduation, Charles decided that he should trans-fer the college funds to a more lucrative investment oppor-tunity. Since he had signed to work in Germany, he evalu-ated investment opportunities in that country. Ultimately, hedecided to invest 30,000 German marks (DM) in so-calledB-Bonds that would mature in 7 years. Charles purchasedthe bonds just 4 years ago last week (in early January of whatwill be called the first year in this discussion). He consid-ered the bonds an excellent investment opportunity, sincethey offered high interest rates (see Table 1) that would riseover the subsequent 7 years and because he could sell thebonds whenever he wanted after the first year. He calculatedthe amount that he would be paid if he sold bonds origi-nally worth DM 100 on the last day of any of the 7 years(see Table 2). The amount paid included the principal plusthe interest. For example, if he sold bonds originally worthDM 100 on December 31 of the sixth year, he would bepaid DM 163.51 (the principal is DM 100, and the interestis DM 63.51).Charles did not sell any of the bonds during the first fouryears. Last year, however, the German federal governmentintroduced a capital gains tax on interest income. The Germangovernment designated that the first DM 6,100 a single in-dividual earns in interest per year would be tax-free. Any in-terest income beyond DM 6,100 would be taxed at a rate of30 percent. For example, if Charles earned interest incomeof DM 10,100, he would be required to pay 30 percent ofDM 4,000 (DM 10,100