A financial analyst is holding some German bonds that offer increasing interest rates if they are kept until their full maturity in three more years. They also can be redeemed at any time to obtain the original principal plus the accrued interest. The German federal government has just introduced a capital gains tax on interest income above a certain level, so holding the bonds to maturity now is less attractive. Therefore, the analyst needs to determine his optimal investment strategy regarding how many bonds to sell during each of the next three years under a few different scenarios.
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