Bridge over ocean
1 May 1980 Financial Analysts Journal Volume 36, Issue 3

Taxes, Margining and Bond Selection

  1. James W. Jenkins

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.

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