The relative attractiveness, and even the investment characteristics, of municipal, corporate and convertible bonds and common stock can change significantly when one considers the effect of margining on after-tax returns. Because margining increases the portion of return received in the form of long-term capital gains, the after-tax yield on a margined discount taxable bond will almost always exceed the yield on an equivalent tax-free municipal.

Margining has a similar effect on the after-tax yields of discount convertible bonds. Margined discount convertibles with close to competitive yields behave like capital gain single payment notes with long-term options attached. And high-premium convertibles, when margined, will generally offer less downside risk and more upside potential than the corresponding common stocks.