Revenue Bond Security
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Revenue Bond Security
Unlike unsecured general obligation bonds, revenue bonds are secured by specific collateral—the income produced by the projects they fund. The revenues (fees, tolls, concessions, rent, etc.) produced by the projects are used to pay investors. Revenue bonds are not paid by taxes as general obligation bonds are.
Things To Know
- Some investors seek to protect themselves from default by insuring their revenue bonds.
Some municipal projects receive additional funding from endowments. The interest from these endowments is sometimes used as revenue bond collateral.
Risk: why revenue bonds pay higher interest rates
Revenue bonds offer higher interest than do general obligation bonds. This is due to the fact that the income from the projects they fund cannot be predicted with certainty. This adds to the perception of lower safety. If the projects do not produce enough revenue, the bonds may default. In that case, the issuer will defer payments to bondholders.
Investors who are willing to risk the possibility of default may choose revenue bonds over general obligation bonds. Some investors seek to protect themselves from default by insuring their revenue bonds.
Ratings firms rate revenue bond issuers for their ability to pay back interest and principal. Bond analysts study the issuers’ ability to produce income sufficient to make payments to investors. They also evaluate the cash flow of the income sources, since the success of the bonds ultimately depends on the projects’ ability to produce revenue.