Revenue bonds
Table of Contents
Revenue bonds
Bonds come in a variety of sizes and forms. The two primary types of municipal bonds are revenue bonds and general obligation bonds, which you may be familiar with if you’ve ever considered buying them. Revenue bonds are debt obligations issued by municipal organisations and repaid with cash from income-generating projects, including toll bridges, highways, wastewater infrastructure, airport buildings, roadways, and local stadiums. Government organisations frequently issue these, and the money they cost is backed by the money they make from the projects.
What is a revenue bond?
A revenue bond is a unique municipal bond that differs from other types of bonds. It guarantees repayment entirely from revenues from a specific company linked to the bonds’ purpose. In contrast to general obligation bonds, only the payments stipulated in the legal agreement between the bondholder and the bond issuer must be used for bond repayment of the principal and interest.
Understanding revenue bonds
One of the two main categories of municipal bonds is revenue bonds, albeit not all revenue bonds are made equal. Different projects, some of which may have radically different profitability prospects, are financed through each bond sale.
Although there is little chance of non-payment, remember that revenue bonds are backed by the success of a particular project, not by a municipality’s general revenue. Investing in revenue bonds may make sense if you want a steady income and can handle some price changes.
Additionally, revenue bonds come with tax advantages that high-tax payers may use to their advantage. Governmental organisations primarily fund infrastructure projects with money from revenue bonds. Construction of bridges, highways, airports, sewer infrastructure, and other similar projects isare only a few of the most prevalent instances of these initiatives.
Characteristics of revenue bonds
The following characteristics apply to revenue bonds:
- As long-term projects are funded with these bonds, the maturity period varies from 20 to 30 years. As a result, these bonds are appropriate for investors with longer investment horizons.
- The assets of the sponsored projects do not belong to the bondholders, which means that bondholders do not have the right to take possession of the project’s assets if the tasks cannot bring in enough money to achieve the promised returns.
- These bonds typically have a callable nature, which allows the issuer to call them back in the event of a dire circumstance.
- Since there is a danger of default on these bonds if projects fail, the issuing bodies frequently offer insurance or a federal bond guarantee.
- Principal and interest payments are made when the relevant projects’ operating costs have been covered. However, fees may be postponed to a later date if operating income is insufficient to cover expenses, which increases the risk of non-payment or default. As a result, these bonds provide higher returns than conventional municipal bonds to make up for the chance to investors.
Structure of revenue bonds
Revenue bonds can be issued in various denominations, including US$1,000 US$ and US$5,000 US$, and typically mature in 20 to 30 years. The sum paid to the investor or bondholder at the bond’s maturity is referred to as the bond’s face value, which is the bond’s value. Some revenue bonds mature on different dates and at other times. They are referred to as serial bonds.
An investor can purchase a revenue bond by paying the bond’s face value upfront. The investor will receive interest payments over the bond’s lifespan in exchange. If the project generates enough money to repay the bond at maturity, the investor will receive their face value back. Investors risk losing their entire investment if the project generates more money.
Example of revenue bonds
Consider the following example to understand revenue bonds. Dylan makes fixed-income investment decisions. He notes that the regional government intends to earn US$ 5 million by selling revenue bonds to fund the development of the new toll bridge.
According to Dylan’s project analysis, the new bridge will cut the distance between the two nearby cities’ travel times in half. He decides to purchase the bonds since he is confident that the toll bridge will produce enough revenue streams. The bonds have a US$1,000 US$ face value, a 30-year maturity, and a 2.5% interest rate. The proceeds from tolls collected once construction is complete will repay the interest and principal.
Frequently Asked Questions
State and local governments frequently issue the following types of revenue bonds:
- A municipality or airport authority may issue an airport revenue bond, a municipal bond backed by income from the airport facility.
- A kind of municipal security called a toll revenue bond is used to finance the construction of public works, including bridges, tunnels, and motorways.
- Municipal debt securities called utility revenue bonds are used to fund public utility projects.
- A particular kind of municipal bond known as a hospital revenue bond is used to finance the development of new hospitals, nursing homes, or associated facilities.
One advantage is that interest income from revenue bonds is typically exempt from federal, state, and local taxes. Investors in high-income tax brackets stand to gain quite a bit from it. It is well-liked in states with high tax rates because of this benefit.
Revenue bonds are disadvantaged over general obligation bonds in that they are vulnerable to higher default risks because they are not backed by the municipality’s full faith and credit.
These bonds are also long-term, implying that the money invested is blocked for a very long period. They provide comparatively lower interest rates than corporate bonds with a similar investment horizon.
An investor can purchase a revenue bond by paying the bond’s face value upfront. The investor will receive interest payments over the bond’s lifespan in exchange.
Governmental organisations primarily use revenue bonds to fund infrastructure projects. The most frequent tasks are building sewer infrastructure, highways, bridges, and airports.
Related Terms
- Perpetual Bond
- Income Bonds
- Junk Status
- Interest-Only Bonds (IO)
- Industrial Bonds
- Flat Yield Curve
- Eurodollar Bonds
- Dual-Currency Bond
- Fixed-to-floating rate bonds
- First Call Date
- Agency Bonds
- Baby Bonds
- Remaining Term
- Callable Corporate Bonds
- Registered Bonds
- Perpetual Bond
- Income Bonds
- Junk Status
- Interest-Only Bonds (IO)
- Industrial Bonds
- Flat Yield Curve
- Eurodollar Bonds
- Dual-Currency Bond
- Fixed-to-floating rate bonds
- First Call Date
- Agency Bonds
- Baby Bonds
- Remaining Term
- Callable Corporate Bonds
- Registered Bonds
- Government Callable Bond
- Bond warrant
- Intermediate bond fund
- Putable Bonds
- Coupon Payment Frequency
- Bond Rating
- Bearer Bond
- Exchangeable bond
- Inflation Linked Bonds
- Indenture
- Lottery bonds
- Nominal Yiеld
- Sovereign Bonds
- Strip Bond
- Variable Rate Demand Note
- Unsecured Bond
- Government Bond
- Floating Rate Bond
- Variable Rate Bond
- Treasury Bond
- Subordinated Bond
- Callable Bonds
- Advance payment guarantee/bond
- Floating rate debt
- Credit Quality
- Accumulating Shares
- Notional amount
- Negative convexity
- Jumbo pools
- Inverse floater
- Forward Swap
- Underwriting risk
- Reinvestment risk
- Final Maturity Date
- Bullet Bonds
- Constant prepayment rate
- Covenants
- Companion tranche
- Savings bond calculator
- Variable-Interest Bonds
- Warrant Bonds
- Eurobonds
- Emerging Market Bonds
- Serial bonds
- Equivalent Taxable Yield
- Equivalent Bond Yield
- Performance bond
- Death-Backed Bonds
- Joint bond
- Obligation bond
- Bond year
- Overhanging bonds
- Bond swap
- Concession bonds
- Adjustable-rate mortgage
- Bondholder
- Yen bond
- Liberty bonds
- Premium bond
- Gold bond
- Reset bonds
- Refunded bond
- Additional bonds test
- Corporate bonds
- Coupon payments
- Authority bond
- Clean price
- Secured bonds
- Perpetual bonds
- Municipal bonds
- Quote-Driven Market
- Debenture
- Fixed-rate bond
- Zero-coupon bond
- Convexity
- Compounding
- Parallel bonds
- Junk bonds
- Green bonds
- Average maturity
- Investment grade bonds
- Convertible Bonds
Most Popular Terms
Other Terms
- Protective Put
- Option Adjusted Spread (OAS)
- Non-Diversifiable Risk
- Merger Arbitrage
- Liability-Driven Investment (LDI)
- Guaranteed Investment Contract (GIC)
- Flash Crash
- Equity Carve-Outs
- Cost of Equity
- Cost Basis
- Deferred Annuity
- Cash-on-Cash Return
- Earning Surprise
- Capital Adequacy Ratio (CAR)
- Bubble
- Beta Risk
- Bear Spread
- Asset Play
- Accrued Market Discount
- Ladder Strategy
- Intrinsic Value of Stock
- Interest Coverage Ratio
- Inflation Hedge
- Industry Groups
- Incremental Yield
- Income Statement
- Holding Period Return
- Historical Volatility (HV)
- Hedge Effectiveness
- Fallen Angel
- Exotic Options
- Execution Risk
- Exchange-Traded Notes
- Event-Driven Strategy
- Enhanced Index Fund
- Embedded Options
- EBITDA Margin
- Dynamic Asset Allocation
- Downside Capture Ratio
- Dollar Rolls
- Dividend Declaration Date
- Dividend Capture Strategy
- Distribution Yield
- Depositary Receipts
- Delta Neutral
- Derivative Security
- Deferment Payment Option
- Dark Pools
- Death Cross
- Debt-to-Equity Ratio
Know More about
Tools/Educational Resources
Markets Offered by POEMS
Read the Latest Market Journal

Recognising Biases in Investing and Tips to Avoid Them
Common biases like overconfidence, herd mentality, and loss aversion influence both risk assessment and decision-making....

What is Money Dysmorphia and How to Overcome it?
Money dysmorphia happens when the way you feel about your finances doesn’t match the reality...

The Employer’s Guide to Domestic Helper Insurance
Domestic Helper insurance may appear to be just another compliance task for employers in Singapore,...

One Stock, Many Prices: Understanding US Markets
Why Isn’t My Order Filled at the Price I See? Have you ever set a...

Why Every Investor Should Understand Put Selling
Introduction Options trading can seem complicated at first, but it offers investors flexible strategies to...

Mastering Stop-Loss Placement: A Guide to Profitability in Forex Trading
Effective stop-loss placement is a cornerstone of prudent risk management in forex trading. It’s not...

Boosting ETF Portfolio Efficiency: Reducing Tax Leakage Through Smarter ETF Selection
Introduction: Why Tax Efficiency Matters in Global ETF Investing Diversification is the foundation of a...

How to Build a Diversified Global ETF Portfolio
Introduction: Why Diversification Is Essential in 2025 In our June edition article (https://www.poems.com.sg/market-journal/the-complete-etf-playbook-for-singapore-investors-from-beginner-to-advanced-strategies/), we introduced...