What are Revenue Bonds?

Published by Thomas Herold in Economics, Investments, Trading

'Revenue Bonds' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Revenue Bonds are municipal bonds. Their payments on principal and interest come from a special project’s revenue. This could be from a highway toll, toll bridge, or area stadium receipts. Whatever the specific project may be, its revenues are what support the underlying bond issues.

These revenue bonds are utilized to finance projects which will eventually produce income for the issuing authority. Generally any government agency or even government fund which they run like a business will be able to issue these types of bonds. Such bonds stand in contrast to those competing types called general obligation bonds, or GO bonds.

General obligation bonds may be paid back by drawing on a number of different tax sources. Those investors who purchase such GO bonds are relying on the “full faith and credit’ by which the municipality promises to repay them with any means necessary. This makes the revenue bond issues riskier. They only can promise the revenues from a particular project. Because of this fact, the revenue bonds pay a higher interest rate than do the GO bonds.

Municipalities structure revenue bonds in a particular way. They possess maturity dates of from 20 to 30 years most of the time. The issuers offer them in standard $5,000 even increments or amounts. There are a number of these bonds which include maturity dates that stagger. This means their maturities will not be on the same day and year. Bond aficionados call these serial bonds.

A toll road is a classic example of such revenue bonds. A municipality might issue this in order to pay to construct a new toll road. The revenue which would secure this issue would be the tolls they collect in the future from those drivers who utilize the road. The construction expenses will have to be covered before the bond holders are completely paid off at maturity.

These revenue bonds became popular because the issuing authorities’ debt limits are set by legislation. They may only borrow so much money according to the laws. These types of bonds allow them to side step the legal debt limit restrictions so that they can build new improvements within their jurisdiction.

This also means that government groups which rely only on only tax dollars can not issue such bonds. Public schools are one example of this. They would not be able to pay off a revenue bond since they would not have any income off of a specific project.

These revenue bonds should not be confused with combination bonds. The combination ones are usually municipal bonds with two sources of financial backing. On the one hand, they enjoy revenue off of an existing or a future project. At the same time, they are covered by the full faith and credit of the issuing municipality or agency. This makes them a true combination of both revenue and general obligation bonds. Naturally, these types of bonds are deemed to be considerably safer. Such lower perceived risk results in the agency paying a lesser interest rate than they would have to give investors on comparable revenue or even general obligation bonds.

It is helpful to consider a real world example of a revenue bond. The MTA Metropolitan Transportation Authority of New York chose to float Green Bonds back in February of 2016. MTA announced it will put this $500 million in total proceeds towards covering the costs of renewal projects on infrastructure. This includes upgrades to their various railroads. The bonds were issued by the Transportation Revenue Bond of the MTA. They received backing from the income of the MTA transportation service. This income comes from two sources, subsidies which the State of New York provides and operating revenues of the agency.

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The term 'Revenue Bonds' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.