What is Revenue Bond?
390 reads · Last updated: December 5, 2024
A revenue bond is a category of municipal bond supported by the revenue from a specific project, such as a toll bridge, highway, or local stadium. Revenue bonds that finance income-producing projects are thus 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.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.
Definition
Revenue bonds are a type of municipal bond that is repaid from the income generated by a specific project, such as toll bridges, highways, or local stadiums. These bonds are used to finance revenue-generating projects and are backed by specific revenue sources. Revenue bonds are also known as municipal revenue bonds, differing from general obligation bonds (GO bonds), which are repaid through various tax sources.
Origin
The concept of revenue bonds originated from the need for municipal financing, particularly in the mid-20th century, when cities needed to raise funds for large infrastructure projects. By issuing revenue bonds, municipalities could use the income generated by the projects themselves to repay the debt, rather than relying on tax revenues.
Categories and Features
Revenue bonds are primarily divided into two categories: project revenue bonds and enterprise revenue bonds. Project revenue bonds are specifically used for financing a single project, such as a bridge or stadium, while enterprise revenue bonds support the operations of an entire enterprise or agency. The main feature of revenue bonds is that their repayment depends on the income from the project or enterprise, rather than the government's taxing power, making them riskier during economic uncertainties.
Case Studies
A typical example is the revenue bonds issued by the New York City Metropolitan Transportation Authority (MTA) to fund the expansion of the subway and public transit systems. The MTA repays these bonds through fare revenues and other operational income. Another example is the revenue bonds issued by the Orange County Toll Road Authority in California, which are repaid through toll revenues from the toll roads.
Common Issues
Common issues investors face when considering revenue bonds include the stability of project income and the credit risk of the bonds. Since revenue bonds rely on the income from specific projects for repayment, any factors affecting project income, such as economic downturns or natural disasters, increase investment risk. Additionally, revenue bonds are generally less secure than general obligation bonds (GO bonds), which are backed by the government's taxing power.
