Definition
A revenue bond is a type of municipal bond that finances income-producing projects and is secured by a specified revenue source. Typically, the revenue bond issuing entity pledges to repay the bond holders with the earnings generated by the project. For example, these may be issued to fund infrastructure projects like toll roads or bridges, and repaid using the tolls collected.
Phonetic
The phonetic spelling of “Revenue Bond” is: Rev-uh-noo Bawnd.
Key Takeaways
Here are the three main takeaways about Revenue Bond:
- Source of Payment: A revenue bond is primarily repaid from the revenue generated by the specific project it was issued to finance. Unlike general obligation bonds, they are not repaid by taxpayers.
- Risk and Interest Rates: Revenue bonds pose more risk to investors compared to general obligation bonds, as their repayment is dependent on the revenue generated from a specific source. As a result, they usually come with higher interest rates to attract investors.
- Common Use: Revenue bonds are commonly used in the financing of infrastructure projects such as bridges, highways, water treatment facilities or airports. These projects are expected to generate revenue from tolls, fees, or other usage charges.
Importance
Revenue bonds are important in the world of business and finance because they are a type of municipal bond specifically designed to fund specific projects that generate revenue. This revenue is then used to repay the bondholders. For investors, revenue bonds can be an appealing investment as they offer a regular income stream and are often tax-exempt. Moreover, investing in revenue bonds can indirectly contribute to community development, as these bonds often fund essential services or infrastructure projects like hospitals, highways, and water treatment plants. However, the safety of revenue bonds is directly correlated to the revenue-generating capacity of the projects they fund, creating an element of risk. Overall, revenue bonds play a significant role in tying project financing to investment opportunities.
Explanation
Revenue bonds are primarily utilized as a way of raising capital for various projects that produce income. These projects can include the construction of highways, bridges, hospitals, housing projects, water and sewage treatment plants, power plants, seaports, airports, and various other infrastructural projects. The fundamental idea behind a revenue bond is to create a source of income that will not only complete the venture but will also generate ample proceeds to pay back the bondholders promptly. Therefore, the purpose of issuing a revenue bond is largely to fund infrastructure that can in turn generate revenue.The usage of revenue bonds is widespread among municipalities and governmental agencies who want to avoid raising taxes or issuing general obligation bonds, which are backed by the issuer’s credit. Instead, revenue bonds provide a way to pay for significant public works projects and services without placing the burden on taxpayers. The revenue generated by these projects is then used to service the debt and repay bondholders, linking the investors’ return directly to the project’s success. This approach provides both the necessary funding for vital community developments and potentially attractive investment opportunities for income-focused investors.
Examples
1. Municipal Revenue Bonds: These are a prime example of the application of revenue bonds. Cities or municipalities issue these bonds to fund infrastructure projects like bridges, water treatment plants, or stadiums. The revenue generated from these projects – such as tolls from bridges or fees for water services – is used to repay bondholders.2. Airport Revenue Bonds: Airports use revenue bonds to fund construction or renovation projects. The revenues earned from landing fees, terminal rents, concession fees, and parking income are used to repay these bonds. For example, in 2017, Denver International Airport issued $2.5 billion in revenue bonds for a terminal renovation project.3. Housing Revenue Bonds: Authorities use these bonds to finance constructions of affordable housing projects. For example, in San Francisco, the Mayor’s Office of Housing and Community Development issued housing revenue bonds to fund the creation and preservation of affordable housing units. The rent from these affordable housing units is then used to repay the bonds over time.
Frequently Asked Questions(FAQ)
What is a Revenue Bond?
A Revenue Bond is a specific type of municipal bond in which its principal and interest are secured by revenues generated by a specific project or source.
Who issues Revenue Bonds?
Revenue Bonds are generally issued by government entities, municipalities, or public utility companies.
What type of projects can be funded with Revenue Bonds?
These bonds often fund projects that will generate continuous income streams. They’re commonly used to fund infrastructure projects like toll roads, bridges, hospitals, and sewer systems.
What happens if the project funded by a Revenue Bond fails to generate enough income for repayments?
If the project funded by a Revenue Bond fails to generate enough income, the bondholders might not receive the full interest payments, or the issuer might not be able to repay the principal on time.
What are the risks associated with investing in Revenue Bonds?
The major risk associated with Revenue Bonds is that the revenue stream from the project being financed may not be sufficient to make the interest payments or repay the principal when due. This could lead to a default on the bond.
Are Revenue Bond interest payments tax-deductible?
Like other municipal bonds, the interest received from Revenue Bonds is often exempt from federal taxes, and sometimes also state and local taxes.
How are Revenue Bonds different from General Obligation Bonds?
Revenue Bonds are backed by specific revenue sources like a toll bridge’s tolls, while General Obligation Bonds are backed by the issuer’s ability to tax its residents.
Where can I buy Revenue Bonds?
Revenue Bonds can be purchased through an investment broker, directly from the issuer, or through a mutual fund specializing in municipal bonds.
What should be considered before investing in Revenue Bonds?
Before investing in Revenue Bonds, it’s important to evaluate the potential profitability of the funded project, the creditworthiness of the issuer, the risks involved, and your own personal tax situation.
Are Revenue Bonds rated for creditworthiness?
Yes, like most other bonds, Revenue Bonds are rated by major credit rating agencies such as Moody’s, Standard & Poor’s, and Fitch. These ratings provide potential investors with an understanding of the relative risk related to the bond.
Related Finance Terms
- Principal Amount
- Debt Service
- Trust Indenture
- Debt Coverage Ratio (DCR)
- Municipal Securities
Sources for More Information
