Suppose there are two types of investors in the municipal bond market. The interest on municipal bonds is tax free. 40% of the participants pay a 30% tax rate and 60% pay a 15% tax rate. Consider the following bond:

Price of bond = $1000

Interest payment on bond = $40

Interest payment on a similar bond with the same price that is not tax free = $55

1. Which, if any, type of investor should choose the municipal bond over the taxable bond? Explain.