Revenue Bond
A revenue bond is a category 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 that is managed in the manner of a business, such as entities having both operating revenues and expenses.Revenue bonds, which are also called municipal revenue bonds, differ from general obligation bonds (GO bonds) that can be repaid through a variety of tax sources.
Revenue Bonds
Definition
Revenue bonds are a type of municipal bond supported by the revenue from a specific project, such as toll bridges, highways, or local stadiums. These bonds are backed by the income generated from the projects they finance. Typically, any government agency or fund that operates in a business-like manner, with both operating income and expenses, can issue revenue bonds. Revenue bonds are also known as municipal revenue bonds and differ from general obligation bonds (GO bonds), which are repaid through various tax sources.
Origin
The concept of revenue bonds originated in the early 20th century when municipal governments began seeking new financing methods to support large infrastructure projects. As urbanization accelerated, municipal governments needed substantial funds to build and maintain public facilities such as bridges, highways, and stadiums. Revenue bonds provided an effective financing tool, allowing these projects to be repaid through the income they generated.
Categories and Characteristics
Revenue bonds can be categorized into several types, including:
- Transportation Revenue Bonds: Used to finance transportation infrastructure projects such as toll roads, bridges, and tunnels. The repayment source is primarily toll fees.
- Utility Revenue Bonds: Used to finance utility projects such as power plants and wastewater treatment facilities. The repayment source is service fees paid by users.
- Stadium Revenue Bonds: Used to finance the construction and maintenance of stadiums. The repayment source is ticket sales and venue rental fees.
The main characteristics of these bonds are clear repayment sources and relatively low risk, but they also depend on the project's operational performance and revenue-generating capacity.
Specific Cases
Case One: A city government issued a series of transportation revenue bonds to build a new toll road. After the road was completed, the toll fees collected each year were used to repay the principal and interest on the bonds. Since the road was located in a busy area, the toll revenue was stable, providing investors with a steady return.
Case Two: A city government issued stadium revenue bonds to construct a new multi-purpose stadium. After the stadium was completed, the revenue from hosting various sports events and concerts, including ticket sales and venue rental fees, was used to repay the bonds. Due to the high utilization rate of the stadium, the revenue was stable, and investors received good returns.
Common Questions
Question One: What are the risks of revenue bonds?
Answer: The main risk of revenue bonds lies in the project's revenue-generating capacity. If the project fails to generate the expected income, it may affect the bond's repayment ability.
Question Two: How do revenue bonds differ from general obligation bonds (GO bonds)?
Answer: Revenue bonds are repaid from the income generated by specific projects, while GO bonds are repaid from municipal government tax revenues. GO bonds are generally considered less risky because their repayment sources are broader and more stable.
