A revenue bond is a type of municipal bond that gets its backing from the income generated by a specific project, like a toll bridge, highway, or local stadium.
So, revenue bonds that fund projects that make money are secured by a particular source of revenue. Usually, any government agency or fund that operates like a business, meaning it has both income and expenses, can issue these bonds.
Also known as municipal revenue bonds, revenue bonds are different from general obligation bonds (GO bonds), which can be paid back using various tax sources.
Learn more about Revenue Bond
A revenue bond pays back creditors using the income produced by the project it funds, like a toll road or bridge. In contrast, GO bond holders depend on the complete faith and credit of the municipality that issues them. Generally, because revenue bond holders can only count on the income from that specific project, they face a higher risk compared to GO bonds, which is why they usually offer a higher interest rate.
Generally, various kinds of revenue bonds are frequently issued by state and local governments:
- Airport revenue bond
- Toll revenue bond
- Utility revenue bonds
- Hospital revenue bond
- Mortgage revenue bonds (MRBs)
- Industrial revenue bonds (IRBs)
The Example
St. Louis, Missouri, is involved in financing through tax-exempt revenue bonds. The usual projects funded this way include multi-family housing, where at least 20% of the units are reserved for families that meet certain income criteria; publicly owned facilities; pollution control facilities; and various fixed assets like land and buildings. Most of these bonds have a maturity period of 20 to 30 years, and the interest earned is typically exempt from federal and most state income taxes. This setup also enables the issuer to offer a lower interest rate.
In February 2016, New York’s Metropolitan Transportation Authority (MTA) made the decision to issue Green Bonds. The MTA plans to use the $500 million raised to fund upcoming infrastructure renewal projects, which include improvements to its railroads. These bonds, issued under MTA’s Transportation Revenue Bond, are supported by the agency’s operating revenue and the subsidies it receives from New York State.