Key Takeaways
- Repaid solely from project-generated revenues.
- Higher risk and yields than general obligation bonds.
- Funds infrastructure like toll roads and utilities.
What is Revenue Bond?
A revenue bond is a type of municipal bond issued by government entities or authorities to fund specific projects that generate their own income, such as toll roads or utilities. Unlike a general obligation bond, repayment depends solely on the project's operating revenues, not on tax revenues or the issuer’s full faith and credit.
This structure allows governments to finance infrastructure without impacting their overall credit or tax base.
Key Characteristics
Revenue bonds have distinct features that differentiate them from other municipal bonds:
- Repayment Source: Payments come exclusively from project-specific revenues, like tolls or user fees, without access to general tax funds.
- Higher Risk and Yield: Because repayment depends on project success, revenue bonds often offer higher yields compared to general obligation bonds but carry greater default risk.
- Long-Term Maturity: Typically issued with maturities of 20 to 30 years and standard face values such as $1,000 or $5,000 per bond.
- Callable Features: Some revenue bonds are callable bonds, allowing issuers to redeem them early under certain conditions.
How It Works
When a government or authority issues a revenue bond, it pledges the income generated by a specific facility or service to repay investors. For example, tolls collected from a bridge or fees from a water system cover both principal and interest payments.
This means if operating revenues decline, bondholders face higher risk as payments may be deferred or reduced. Investors should analyze revenue projections carefully and consider market factors like the par yield curve to assess bond pricing and yields.
Examples and Use Cases
Revenue bonds finance various infrastructure projects where user fees support debt service:
- Airlines: Companies like Delta may benefit indirectly from airport revenue bonds that fund terminal expansions.
- Transportation: Toll roads and public transit systems often issue revenue bonds; for example, the Bay Area Rapid Transit system finances expansions through such bonds.
- Utilities: Local water districts issue revenue bonds repaid by customer bills, ensuring dedicated funding for maintenance and upgrades.
Important Considerations
Revenue bonds do not have the backing of general tax revenues, making them riskier than general obligation bonds. You should evaluate the stability and sufficiency of the project's revenue stream before investing.
Additionally, these bonds may be exempt from some regulatory filings but remain subject to anti-fraud rules and oversight. For diversified exposure, consider bond ETFs that include revenue bonds, balancing risk and return efficiently.
Final Words
Revenue bonds rely solely on project-generated revenues for repayment, making them riskier but potentially higher-yielding than general obligation bonds. Before investing, assess the project's revenue stability and compare bond terms to ensure alignment with your risk tolerance.
Frequently Asked Questions
A revenue bond is a type of municipal bond issued to finance specific projects that generate their own revenue, such as toll roads or utilities. Repayment depends solely on the project's operating income rather than general taxes.
Unlike general obligation bonds backed by taxing power and overall revenues, revenue bonds are repaid only through the revenues generated by the specific project they fund, without relying on tax revenues or the issuer's full credit.
Revenue bonds commonly finance infrastructure like toll roads, airports, hospitals, utilities, and public transit, where users pay fees, tolls, or service charges that cover bond repayments.
Yes, revenue bonds generally carry higher risk than general obligation bonds because repayment depends entirely on the project's success and its revenue stream, which can fluctuate.
Common types include transportation revenue bonds, utility revenue bonds, special tax revenue bonds, industrial development bonds, lease rental bonds, special assessment bonds, housing authority bonds, and double-barreled bonds.
Yes, if the project's revenues fall short, the issuer cannot use tax revenues or other assets to cover payments, making revenue bonds more vulnerable to default compared to tax-backed bonds.
A double-barreled bond is primarily repaid by project revenues but also backed by the issuer's taxing power as a fallback, providing additional security for investors.
Revenue bonds are generally exempt from some Securities Act of 1933 filings but must comply with anti-fraud provisions under the Securities Exchange Act of 1934 and are overseen by FINRA.
