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 a 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 a 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. Obligation Bond

    A municipal bond whose face value of the bond is greater than ...
  2. Bond Fund

    A bond fund is a fund invested primarily in bonds and other debt ...
  3. Bond Market

    The bond market is the environment in which the issuance and ...
  4. Bond

    A bond is a fixed income investment in which an investor loans ...
  5. Serial Bond

    A serial bond is a bond issue in which a portion of the outstanding ...
  6. Term Bond

    Term bonds mature on a specific date in the future and the bond ...
Related Articles
  1. Investing

    The Basics Of Municipal Bonds

    Investing in municipal bonds may offer a tax-free income stream, but such bonds are not without risks. Check out types of bonds and the risk factors of muni-bond.
  2. 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.
  3. Investing

    Taxation Rules for Bond Investors

    To sum-up there are three types of bonds: government bonds, municipal bonds, and corporate bonds. Find out how each of these bonds are taxed and what you can do as an investor.
  4. Investing

    Using U.S. Savings Bonds As a Long-term Investment

    A 20-year Series EE savings bond pays more interest than a 20-year Treasury bond. Government-issued long-term bonds might not always be the best choice.
  5. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  6. Investing

    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.
  7. Retirement

    Should I Invest in Bonds After I Retire?

    Yes, retirees should invest in bonds, but remember that not all bonds are safe investments. Seek the help of a financial advisor.
RELATED FAQS
  1. How are municipal bonds taxed?

    Discover information about the various tax implications for municipal bonds and zero-coupon municipal bonds at the state ... Read Answer >>
Trading Center