What Is a Revenue Bond?
Let me explain what a revenue bond is: it's a type of municipal bond that's backed by the revenue from a specific project, like a toll bridge, highway, or local stadium. These bonds finance projects that generate income, and they're secured by that particular revenue source. You should know that revenue bonds can be issued by any government agency or fund operated like a business, meaning they have operating revenues and expenses.
Revenue bonds, also known as municipal revenue bonds, are different from general obligation bonds, or GO bonds, which can be repaid using various tax sources.
Key Takeaways
Here's what you need to remember: revenue bonds are municipal bonds used to fund public projects, and they repay investors from the income those projects produce. For example, a toll road or utility might be financed this way, with interest and principal paid back from collected tolls or fees. Unlike GO bonds, revenue bonds are tied to specific projects and aren't funded by taxpayers.
Understanding Revenue Bonds
A revenue bond repays its creditors from the income generated by the project it's funding, such as a toll road or bridge. While revenue bonds are backed by a specific revenue stream, GO bond holders rely on the issuing municipality's full faith and credit. Because revenue bond holders depend only on the project's income, these bonds carry higher risk than GO bonds and thus offer a higher interest rate.
State and local governments issue several types of revenue bonds. Let me walk you through them.
Types of Revenue Bonds
- Airport revenue bonds are issued by municipalities or airport authorities, backed by airport revenues, and they can be public-purpose or private depending on private sector benefits.
- Toll revenue bonds finance public projects like bridges or expressways, with repayments coming from user tolls.
- Utility revenue bonds, or essential services bonds, fund public utility projects and are repaid from project revenues, not general taxes.
- Hospital revenue bonds support building or upgrading hospitals and related facilities, with repayments from hospital revenues.
- Mortgage revenue bonds, or housing bonds, are issued by housing finance agencies to fund affordable mortgages for low- and middle-income people.
- Industrial revenue bonds are issued on behalf of private companies to build or acquire factories and equipment.
Structure of Revenue Bonds
Revenue bonds typically mature in 20 to 30 years and come in increments like $1,000 or $5,000. The face value is what gets paid back to you at maturity. Some have staggered maturities, called serial bonds.
You can buy a revenue bond by paying the face value upfront, and in return, you get interest payments over the bond's life. At maturity, you receive the face value back, but only if the project generates enough revenue. If not, you risk losing your investment.
Take a new toll road as an example: tolls from drivers pay off the bond after covering building costs. Revenue bonds help municipalities avoid debt limits, but entities like public schools can't issue them since they lack project-specific revenues.
Real-Life Examples
In St. Louis, Missouri, they use tax-exempt revenue bond financing for projects like multi-family housing with units set aside for income-qualified households, publicly owned facilities, pollution control, and fixed assets. These bonds mature in 20 to 30 years, with tax-exempt interest that lets issuers pay lower rates.
New York's Metropolitan Transportation Authority issued Green Bonds in February 2016, raising $500 million for infrastructure like railroad upgrades. These are backed by operating revenues and state subsidies under their Transportation Revenue Bond program.
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