Revenue Bond

A type of municipal bond issued to finance revenue-generating projects and repaid with the revenues produced by those projects, such as toll bridges, highways, educational facilities, hospitals, sewer systems, stadiums, or other public facilities.
On this page

Revenue Bond

Definition: A revenue bond is a type of municipal bond issued to fund public infrastructure projects that are expected to generate revenue. These bonds are repaid solely from the income generated by the specific project they finance. Unlike general obligation bonds, revenue bonds are not backed by the full faith and credit of the issuing municipality but rely on the project’s operational revenue.

Examples of Revenue-Bond-Financed Projects:

  1. Toll Bridge:
    • A bridge that collects tolls from vehicles to generate revenue.
  2. Highway:
    • A toll highway that generates income from the fees charged to users.
  3. Educational Facility:
    • A university campus extension financed through student fees and other incomes derived from its services.
  4. Hospital:
    • A public hospital funded by the revenue from patient services and other medical fees.
  5. Sewer System:
    • A city sewer project where the repayment is sourced from utility fees charged to users.
  6. Stadium:
    • A sports stadium financed by ticket sales, naming rights, and other events-generated revenue.

Frequently Asked Questions (FAQs):

What distinguishes revenue bonds from general obligation bonds?

Revenue bonds are repaid from the income generated by the specific project they fund, while general obligation bonds are repaid through the issuing municipality’s taxation powers, backed by its full faith and credit.

Are revenue bonds considered less secure than general obligation bonds?

Yes, because revenue bonds depend on the financial success of a specific project rather than the broader creditworthiness of the issuing municipality, making them typically riskier investments.

Can revenue bonds be used to fund any type of project?

Revenue bonds are typically used to fund revenue-generating projects that serve a public need and are expected to produce a predictable income stream.

What happens if the project financed by revenue bonds fails to generate sufficient revenue?

If the project does not generate enough revenue to cover bond payments, the bondholders may not receive their expected returns, leading to potential defaults.

Do revenue bonds offer tax advantages?

Yes, like other municipal bonds, interest income from revenue bonds is often exempt from federal income tax and possibly state and local taxes, depending on the jurisdiction.

  1. Municipal Bond:
    • A debt security issued by a state, municipality, or county to finance its capital expenditures, including schools, highways, and other public projects.
  2. General Obligation Bond:
    • A municipal bond backed by the credit and taxing power of the issuing jurisdiction, rather than the revenue from a specific project.
  3. Debt Service:
    • The total amount of money needed for repayment of principal and interest on outstanding loans or bonds during a period of time.
  4. Credit Rating:
    • An evaluation of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation.

Online References:

Suggested Books for Further Studies:

  • “The Fundamentals of Municipal Bonds” by SIFMA (Securities Industry and Financial Markets Association)
  • “Municipal Bond Markets: A Guide for Analysts and Investors” by David W. Johnson
  • “Investing in Income Properties: The Big Six Formula for Achieving Wealth in Real Estate” by Kenneth D. Rosen

Fundamentals of Revenue Bonds: Finance Basics Quiz

Loading quiz…

Thank you for exploring the intricate world of revenue bonds and honing your finance knowledge through our engaging quiz. Keep pursuing financial excellence!

Revenue Bonds
Revenue Anticipation Note (RAN)