Revenue Bond
Key takeaways
- A revenue bond is a municipal bond repaid from the income generated by a specific project (for example, tolls or utility fees), not from general tax revenues.
- Because repayment depends on a single revenue stream, revenue bonds typically carry higher risk and higher interest rates than general obligation (GO) bonds.
- Common uses include financing airports, toll roads, utilities, hospitals, affordable housing, and private-sector industrial projects.
What is a revenue bond?
A revenue bond is a form of municipal debt issued to finance an income-producing public project. Investors are repaid from the project’s revenues—such as tolls, user fees, or service charges—rather than from a municipality’s general tax base. If project revenues fall short, bondholders may not receive full repayment, which increases risk relative to GO bonds that are backed by the issuer’s taxing power.
How revenue bonds differ from general obligation (GO) bonds
- Revenue bonds: Secured by a specific project’s revenue stream; repayment depends on that project’s financial performance.
- GO bonds: Backed by the issuer’s full faith and credit and usually repaid from tax revenues; generally considered lower risk and therefore often offer lower interest rates.
Common types of revenue bonds
- Airport revenue bonds — Backed by fees and revenues from airport operations; sometimes subject to public-purpose rules.
- Toll revenue bonds — Issued to finance bridges, tunnels, or highways and paid from toll collections.
- Utility revenue bonds — Fund public utility projects (water, sewer, electric) and are repaid from utility charges.
- Hospital revenue bonds — Used to construct or upgrade hospitals and repayable from hospital-generated revenues.
- Mortgage revenue bonds (housing bonds) — Issued by housing finance agencies to fund affordable mortgages; often tax-exempt for investors.
- Industrial revenue bonds (IRBs) — Issued by government agencies on behalf of private companies to finance factories or equipment; repayment depends on the project or contractual payments.
Structure and repayment
- Maturities: Often 20–30 years; may be issued in standard increments (e.g., $1,000 or $5,000).
- Face value: The amount returned to investors at maturity if sufficient revenues exist.
- Serial bonds: Some issues mature in staggered increments rather than a single date.
- Repayment priority: Project operating expenses are typically paid first; bondholders are repaid from remaining revenues.
- Risk and return: Because repayment depends on a single revenue source, these bonds usually carry greater credit risk and higher yields than GO bonds.
Examples
- Municipal housing and infrastructure programs often use tax-exempt revenue bonds to finance multi-family housing, pollution control facilities, and public assets, with revenues and tax-exempt interest benefits helping lower borrowing costs.
- Transit authorities may issue revenue bonds (including green bonds in some cases) backed by operating revenues and subsidies to fund infrastructure upgrades.
Considerations for investors
- Assess the reliability and diversity of the revenue source supporting the bond.
- Review covenants, reserve funds, and priority of claims in the bond documents.
- Compare yields and credit ratings to GO bonds and other fixed-income options.
- Understand tax treatment—many revenue bonds are tax-exempt at the federal (and sometimes state) level, but tax status varies by issue.