Revenue Bond


DEFINITION of 'Revenue Bond'

A municipal bond supported by the revenue from a specific project, such as a toll bridge, highway or local stadium. Revenue bonds are municipal bonds that finance income-producing projects and are secured by a specified revenue source.

Typically, revenue bonds can be issued by any government agency or fund that is run in the manner of a business - those entities having both operating revenues and expenses. Revenue bonds differ from general obligation bonds (GO bonds) that can be repaid through a variety of tax sources. Also called a municipal revenue bond.

BREAKING DOWN 'Revenue Bond'

For example, if a revenue bond is issued to build a new toll road, the tolls that are collected from motorists who drive on the road would be used to pay off the bond (after the building expenses had been paid). A primary reason for using revenue bonds is that they allow the municipality to avoid reaching legislated debt limits. An agency that is run solely on tax dollars, such as a public school, cannot issue revenue bonds, since these entities would be unable to pay off the bond using revenues from the specific project.

Generally, revenue bonds mature in 20 to 30 years and are issued in $5,000 units. Some revenue bonds have staggered maturity dates and do not mature at the same time (these are known as serial bonds). Unlike general obligation bonds, which are backed by the full faith and credit of the municipality, revenue bonds carry a higher risk of default.

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