Revenue bonds

Definition

Revenue bonds are municipal bonds that finance income-producing projects and are secured by the revenue generated from those projects. They differ from general obligation bonds, which are backed by the issuer's credit and taxing power.

5 Must Know Facts For Your Next Test

1. Revenue bonds are typically used to fund public projects like toll roads, bridges, or airports.
2. These bonds are not backed by the full faith and credit of the issuing municipality but solely by specified revenue sources.
3. They generally carry a higher risk than general obligation bonds because their repayment depends on the project's success.
4. The interest earned on revenue bonds is often exempt from federal income tax and sometimes state and local taxes as well.
5. Investors typically assess the viability of the project generating sufficient revenue before purchasing these bonds.

Review Questions

• What secures a revenue bond?
• How do revenue bonds differ from general obligation bonds?
• Why might an investor consider purchasing a revenue bond despite its higher risk?

Related terms

General Obligation Bonds: Municipal bonds backed by the credit and taxing power of the issuing jurisdiction rather than specific project revenues.

Municipal Bonds:

Debt securities issued by states, cities, counties, or other governmental entities to fund public projects.

Tax-Exempt Bonds: Bonds whose interest payments are exempt from federal income tax and potentially state and local taxes for residents in the issuing state.