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. Serial Bond

    A bond issue in which a portion of the outstanding bonds matures ...
  3. Double Barreled

    A municipal general obligation bond in which the cash flows are ...
  4. Tax-Exempt Sector

    The market niche comprised of investment vehicles exempt from ...
  5. Bond Resolution

    1. A document used with government bonds, especially general ...
  6. Mortgage-Backed Revenue Bond

    A type of municipal agreement that pays holders based on revenues ...
Related Articles
  1. Investing

    Why Muni Bonds and Bond Funds are Perfect Together

    Municipal bonds and bond funds differ in several ways, which is partly why they complement each other well.
  2. Investing

    The Basics Of Municipal Bonds

    Investing in these bonds may offer a tax-free income stream but they are not without risks.
  3. 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.
  4. 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.
  5. Investing

    Corporate Bond Basics: Learn to Invest

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

    Taxation Rules for Bond Investors

    Several factors affect the taxable interest that must be reported. Learn more here.
  7. 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.
  8. Investing

    Municipal Bond Tips For The Series 7 Exam

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

    Surprise! The Best Long-term Bond Investment May Be Savings Bonds

    A 20-year Series EE savings bond pays more interest than a 20-year Treasury bond. So are government-issued long-term bonds the best bet going?
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
Hot Definitions
  1. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  2. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
  3. Nonce

    Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.
  4. Coupon

    The annual interest rate paid on a bond, expressed as a percentage of the face value. It is also referred to as the "coupon ...
  5. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
  6. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
Trading Center