What is a 'Revenue Bond'

A revenue bond is 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 managed in the manner of a business, such as entities having both operating revenues and expenses.

BREAKING DOWN 'Revenue Bond'

Revenue bonds, which are also called municipal revenue bonds, differ from general obligation bonds (GO bonds) that can be repaid through a variety of tax sources. While a revenue bond is backed by a specific revenue stream, holders of GO bonds are relying on the full faith and credit of the issuing municipality. Typically, since holders of revenue bonds can only rely on the specific project's income, it has higher risk than GO bonds and pays a higher rate of interest.

Structure of Revenue Bonds

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.

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 have 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.

Real Life Examples

St. Louis, Missouri, engages in tax-exempt revenue bond financing. Typical projects funded this way are multi-family housing, in which at minimum of 20% of the units are set aside for households meeting income guidelines; publicly owned facilities; pollution control facilities; and various fixed assets such as land/buildings. The maturity of most of the issues is 20 to 30 years, and interest earned is generally tax-exempt from federal and most state income taxes. This also allows the issuer to pay a lower interest rate.

New York's Metropolitan Transportation Authority (MTA) decided to offer Green Bonds in February 2016. The MTA is using the $500 million of proceeds to pay for planned infrastructure renewal projects, including upgrades on its railroads. The bonds, issued under MTA's Transportation Revenue Bond, are backed by the agency's operating revenue and subsidies received from New York State.

RELATED TERMS
  1. Combination Bond

    A bond, typically a municipal bond, that has financial backing ...
  2. Municipal Bond

    A debt security issued by a state, municipality or county to ...
  3. Bond

    A debt investment in which an investor loans money to an entity ...
  4. Revdex

    A bond index that estimates the approximate yield that an investor ...
  5. Double Barreled

    A municipal general obligation bond in which the cash flows are ...
  6. Serial Bond

    A bond issue in which a portion of the outstanding bonds matures ...
Related Articles
  1. Investing

    The Basics Of Municipal Bonds

    Investing in these bonds may offer a tax-free income stream but they are not without risks.
  2. Investing

    5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

    Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.
  3. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  4. Investing

    Municipal Bond Tips For The Series 7 Exam

    Learn to distinguish between general obligation and revenue bonds to ace this test.
  5. Investing

    The Best Bet for Retirement Income: Bonds or Bond Funds?

    Retirees seeking income from their investments typically look into bonds. Here's a look at the types of bonds, bond funds and their pros and cons.
  6. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  7. Investing

    Taxation Rules for Bond Investors

    Several factors affect the taxable interest that must be reported. Learn more here.
  8. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  9. Financial Advisor

    Muni Bonds, Taxable Bonds or CDs: Which is Best?

    Here's how to tell if municipal bonds are a better investment than taxable bonds or CDs.
  10. Investing

    Should You Consider Muni Bonds?

    Municipal bonds come in two types. General obligation bonds repay their holders through taxes. They often have low interest rates, but they’re safe.
RELATED FAQS
  1. Who or what is backing municipal bonds?

    Learn about the basics of municipal bonds, including the various revenue sources that are utilized to back or secure municipal ... Read Answer >>
  2. What do cities do with the funds generated from municipal bonds?

    Learn more about municipal bonds, including the various types of bonds issued and the purposes of municipal bond funds, such ... Read Answer >>
  3. How do the returns on municipal bonds compare to those of other bonds?

    Learn how tax-free municipal bonds may provide better returns than other types of bonds, and understand the risks of municipal ... Read Answer >>
  4. Where can I buy government bonds?

    The type of bond determines where you can purchase it, so you need to decide which type of bond you would like to purchase ... Read Answer >>
  5. What forms of debt security are available for the average investor?

    Discover the various different types of debt securities, issued by government entities or corporations, that are available ... Read Answer >>
  6. How are municipal bonds taxed?

    Discover information about trading municipal bonds, specifically the various tax implications municipal bonds have at state ... Read Answer >>
Hot Definitions
  1. Profitability Index

    An index that attempts to identify the relationship between the costs and benefits of a proposed project through the use ...
  2. Restricted Stock Unit

    Compensation offered by an employer to an employee in the form of company stock. The employee does not receive the stock ...
  3. Operating Ratio

    A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Calculated as:
  4. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  5. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  6. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
Trading Center