Revenue bonds are a distinct category of municipal bonds that are financed by the revenue generated from a specific project. These bonds differ markedly from general obligation bonds, which are backed by the full faith and credit of the issuing municipality.
Characteristics of Revenue Bonds
Revenue bonds have several defining characteristics:
- Project-Specific Revenue: The bond’s principal and interest payments are funded through the revenue generated by the project it finances.
- Risk and Returns: Typically, revenue bonds can carry higher risk than general obligation bonds, due to their reliance on the project’s success, but they may also offer higher returns.
- Non-Recourse: Investors in revenue bonds can only claim repayment from the project’s revenue, not from the broader tax base of the issuing municipality.
Types of Revenue Bonds
Revenue bonds come in various forms:
- Utility Revenue Bonds: Bonds issued to finance public utilities such as water, sewage, and electricity services.
- Transportation Revenue Bonds: Bonds backed by the revenue from bridges, toll roads, and public transit systems.
- Healthcare Revenue Bonds: Issued to finance healthcare facilities and hospitals, repaid through fees for services.
- Education Revenue Bonds: Support the financing of educational institutions and are repaid by student tuition and other fees.
- Special Assessment Bonds: These are repaid from assessments charges on those who benefit from the project.
Historical Context
Revenue bonds have been a critical funding mechanism for municipal projects since their popularization in the 19th century. Their usage grew significantly during the 20th century, funding everything from infrastructure to public utilities, and they remain integral to municipal financing today.
Examples of Revenue Bonds
- Golden Gate Bridge Revenue Bonds: Financed the construction of the Golden Gate Bridge, repaid through tolls collected from bridge users.
- Denver International Airport Bonds: Used to fund the development of the airport, repaid through airport fees and leases.
Advantages and Disadvantages
Advantages
- Targeted Financing: Ensures that only the beneficiaries of a project pay for it.
- Off-balance-sheet Financing: Often doesn’t impact the general indebtedness level of the issuing government.
- Investor Attraction: Can attract investors seeking municipal bonds with potentially higher yields.
Disadvantages
- Higher Risk: Revenue can be unpredictable if the project fails to generate expected revenue.
- Project Specific: Investors must be knowledgeable about the specific project and its revenue potential.
Comparisons with General Obligation Bonds
Revenue bonds and general obligation bonds serve different purposes and carry different risk profiles. While general obligation bonds are repaid through taxation, revenue bonds depend solely on the revenue from a specific project, making them riskier but potentially more rewarding.
FAQs
1. What is a revenue bond?
A revenue bond is a type of municipal bond supported by the revenue generated from a specific project.
2. How do revenue bonds differ from general obligation bonds?
Revenue bonds are repaid from project-specific income, whereas general obligation bonds are backed by the issuer’s taxing power.
3. What are some common projects funded by revenue bonds?
Projects often funded by revenue bonds include toll roads, airports, utilities, and healthcare facilities.
References
- “Municipal Bonds: Understanding Credit Risk,” Securities Industry and Financial Markets Association (SIFMA).
- “Revenue Bonds Overview,” Municipal Securities Rulemaking Board (MSRB).
Summary
Revenue bonds are a vital tool for municipalities to fund specific projects that generate their revenue. They offer distinct advantages and risks compared to other types of municipal bonds, making them a unique investment opportunity. Understanding the types, risks, and benefits of revenue bonds can help investors and municipalities alike in funding and investment decisions.
