DEFINITION of 'Hospital Revenue Bond'

A type of municipal bond to support the construction of new hospitals or new equipment and upgrades for existing hospitals. The revenue created by the hospitals is then used to pay back bondholders. Generally, bondholders are paid only after the expenses of running the hospital are paid, creating risk for bondholders if the hospital is not as profitable as anticipated. Income received from a hospital revenue bond may be exempt from state, local and/or federal taxation.

BREAKING DOWN 'Hospital Revenue Bond'

As their name suggests, revenue bonds are generally backed by the revenue that the specific project is able to generate. If this revenue is insufficient, municipalities have no obligation to use other funds to pay back bondholders. This means that revenue bonds typically command higher yields, since their default risk is greater than a general obligation bond. Ratings firms evaluate a revenue bond issue and assign a ranking indicating the probability that the obligation will be paid as scheduled.

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