What Are Revenue Bonds?
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What Are Revenue Bonds?
Revenue bonds are municipal bonds that are secured by specific income of the issuer. The method of securing the loan is what distinguishes them from their municipal cousins, the general obligation bonds (or GO bonds). GO bonds are secured by the full faith and credit of the municipality that issues them.
Things To Know
- Revenue bonds are municipal bonds that finance income-producing projects.
- Revenue bonds fund municipal projects.
What revenue bonds do
States, cities, and municipal subdivisions issue municipal bonds. Their purpose is to fund municipal projects, such as housing, hospitals, lighting systems, parking ramps, stadiums, factories, sewer systems, and dozens of other community enterprises. Revenue bonds are municipal bonds that finance income-producing projects. The income generated by these projects pays revenue bondholders their interest and principal. Projects funded by revenue bonds serve only those in the community who pay for their services. GO bonds, in contrast, finance projects that do not produce income but provide services for the entire community.
How they work
Most revenue bonds are sold in $5,000 units and mature in 20 to 30 years. However, not all the bonds in the issue mature at the same time; they may have staggered maturity dates. Bond issues with staggered maturity dates are known as serial bonds.
Income from a municipal enterprise is put into a revenue fund. From this fund, expenses for operations are paid first. Only after operations expenses are paid do revenue bondholders receive their payments.
Because they are not backed by the full faith and credit of a municipality as are general obligation bonds, they carry a somewhat higher default risk for which they offer higher interest rates.