4.2.14.2. Revenue Bonds
Revenue bonds are bonds that finance projects in which principal and interest payments to the bondholder are paid from the revenue generated by those projects.
Issuers of revenue bonds may be municipal governments, government agencies, or public authorities (such as the New York City Housing Authority or the Chicago Transit Authority). Public authorities are formed to promote the public interest by financing, building, and operating public facilities. Revenue bonds finance airports, mass transit systems, roads and bridges, libraries, and hospitals.
Income from concessions, tolls, or user fees is put into a revenue fund. The project’s expenses are paid first out of the fund, with the remaining money going to bondholders.
Revenue might also be generated by rental or lease payments. A state may create a nonprofit authority to build a school and then lease the facility to a local government. Since these projects only serve those in the community who use the services, users of these services are asked to pay for them, as opposed to the general taxpayer.
In addition, revenue bonds may be issued when voter approval for general obligation bonds cannot be attained. Or revenue bonds may be used to finance projects when statutory debt limitations prevent a municipality from issuing GO bonds. Because bond payments are contingent on a project’s success, and because projects funded by revenue bonds may have no access to tax revenues, revenue bonds are riskier and require higher yields to entice buyers.
From a suitability perspective, remember that municipal bonds are good for investors in high tax brackets. In addition, municipal bonds often provide