A revenue bond is a type 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 managed like a business, having both operating revenues and expenses. Revenue bonds, unlike general obligation bonds, are project-specific and are not funded by taxpayers.
Key Takeaways
- Revenue bonds fund public projects and repay investors from the income created by those projects.
- Projects like toll roads or utilities can be financed with municipal bonds, with creditors’ interest and principal repaid from the collected tolls or fees.
- Revenue bonds carry higher risk compared to general obligation bonds and generally offer higher interest rates.
Understanding Revenue Bonds
A revenue bond repays creditors from the income generated by the project that the bond itself funds, such as a toll road or bridge. While a revenue bond is backed by a specific revenue stream, holders of general obligation (GO) bonds depend on the full faith and credit of the issuing municipality. Since holders of revenue bonds can only rely on the project’s specific income, these bonds generally carry higher risks and offer higher interest rates than GO bonds.
Types of Revenue Bonds
Many types of revenue bonds are commonly issued by state and local governments. Here are a few key types:
- Airport Revenue Bonds: Issued by municipalities or airport authorities, backed by the revenues of the airport facility. Some are public-purpose bonds, while others are private if more than 10% of the benefits go to the private sector.
- Toll Revenue Bonds: Used to build public projects like bridges or expressways. Revenues from tolls paid by users pay the principal and interest payments on the bond.
- Utility Revenue Bonds: Finance public utility projects, with repayment directly from project revenues rather than a general tax fund.
- Hospital Revenue Bonds: Support the construction of new hospitals or related facilities and finance upgrades for existing ones. The revenue created by the hospitals repays the bondholders.
- Mortgage Revenue Bonds: Issued by Housing Finance Agencies to finance affordable mortgages for low- and middle-income people.
- Industrial Revenue Bonds: Issued on behalf of a private sector company to build or acquire factories or other heavy equipment and tools.
Structure of Revenue Bonds
Often maturing in 20 to 30 years, revenue bonds can be issued in increments of $1,000 and $5,000. The bond’s face value is the amount paid to the investor at maturity. Serial bonds have staggered maturity dates. Investors pay the face value of the bond upfront and earn interest over the bond’s life. If the project revenue is insufficient to pay back the bond, investors risk their total investment.
Real-Life Examples
St. Louis, Missouri: This city engages in tax-exempt revenue bond financing for projects like multi-family housing, public facilities, pollution control facilities, and fixed assets like land and buildings. These bonds typically mature in 20 to 30 years and are generally tax-exempt from federal and most state income taxes, allowing for lower interest rates.
New York’s Metropolitan Transportation Authority (MTA): In February 2016, the MTA offered Green Bonds, using $500 million of proceeds for infrastructure renewal projects, including rail upgrades. These transportation revenue bonds were backed by the agency’s operating revenue and subsidies from New York State.
Revenue bonds are pivotal in driving many essential public projects, ensuring that necessary infrastructure is developed and maintained without burdening taxpayers, while providing attractive investment opportunities.
Related Terms: General Obligation Bonds, Airport Revenue Bonds, Toll Revenue Bonds, Utility Revenue Bonds, Hospital Revenue Bonds, Mortgage Revenue Bonds, Industrial Revenue Bonds
References
- St. Louis-MO.gov. “Tax Exempt Revenue Bond Financing”.
- Reuters.com. “New York’s MTA eyes nascent ‘green bond’ market with $500 million bond”.
