Revenue BondsMunicipal bonds that are backed by a specified revenue source

One of the safest forms of investment is bonds, especially government-issued bonds.

They’re low-risk investments that almost always guarantee a return.

They’re even more secure if they’re issued by the government just because you know that the issuer-borrower won’t default on its payments.

But of course, there’s a trade-off for this safety. In most cases, bonds yield a lower rate of returns than stocks.

There are many types of bonds. Some of them are issued by private companies, while others are issued by government agencies and bodies.

Among these are revenue bonds, a type of municipal bond.

Revenue bonds, unlike general obligation bonds, aren’t repaid through a variety of tax sources.

Rather, a specific revenue source pays for them.

This makes them inherently riskier than general obligation bonds.

However, they provide higher returns which might just be enough to attract investors.

But before you go and purchase revenue bonds, it would be wise to know about them first.

That’s why in this article, we will be talkin

g about them.

What are they?

What differentiates them from general obligation bonds?

Why should I invest in them?

Do they really yield higher returns?

We will try to answer these questions as we go along with the article.

What Are Revenue Bonds?

Revenue bonds (a.k.a. municipal revenue bonds) are a category of municipal bonds.

They are supported by a specified revenue source, typically a revenue-producing project such as a toll bridge, water utility, airport, seaport, local stadium, etc.

Government entities primarily utilize revenue bonds to subsidize infrastructure projects.

It could be the government entity itself that issues revenue bonds. Or it could be a fund (e.g. trust fund) that is managed akin to that of a business.

Unlike their general obligation (GO) counterparts, revenue bonds aren’t secured by all the revenues generated by the government entity.

Rather, they are only guaranteed by the revenues generated by the projects that were subsidized using them.

This means that if the project doesn’t produce revenue, the holders of the revenue bond won’t get a return.

This makes revenue bonds inherently riskier than general obligation bonds.

To make up for this additional risk, revenue bonds generally offer higher rates of interest.

As such, investors who are willing to take an additional risk for a higher return are likely to consider revenue bonds.

Characteristics of Revenue Bonds

Longer time to maturity

Revenue bonds typically feature longer maturities than general obligation bonds.

This is usually because the projects that the bonds are utilized for are typically long-term projects.

In general, revenue bonds have a maturity range of 20 to 30 years. They come in increments of $1,000 or $5,000.

Some revenue bonds may feature staggered maturity dates. We refer to these bonds as serial bonds.

The interest and principal payments of revenue bonds come from the revenue of the project that it subsidizes.

If the project does not produce enough revenue to make the payments, they (the payments) will then be deferred to a later date until the project makes sufficient revenue.

The longer time to maturity can be attractive for investors who are looking for a safe and long-term investment.

Since revenue bonds are still bonds, they are generally safer than stocks.

Higher rate of returns than general obligation bonds

Revenue bonds carry a higher risk than general obligation bonds.

To make up for this, revenue bonds usually offer higher interest rates to attract potential investors.

Unlike general obligation bonds that are paid for by various tax sources, revenue bonds are only guaranteed by the revenue that the specified project produces.

However, the higher interest rates the revenue bonds offer can provide investors with higher returns overall. In short, added risks, added rewards.

Now while revenue bonds are inherently riskier than their other counterparts, they’re still bonds.

This means that they’re still generally less risky than stocks. As such, revenue bonds are ideal for investors who are looking for investments that have a higher yield but aren’t as risky as stocks.

Types of Revenues Bonds

The following are some of the types of revenue bonds that state and local governments issue:

• Airport revenue bonds
• Transportation revenue bonds
• Education revenue bonds
• Hospital revenue bonds
• Industrial revenue bonds
• Mortgage revenue bonds
• Utility revenue bonds

Airport revenue bonds

An airport revenue bond is usually issued by a municipality or airport authority to subsidize the operations of an airport.

The revenues of the airport facility will then be used to pay for the bond.

An airport revenue bond may either be a public-purpose bond or a private bond. If more than 10% of the benefit of the airport goes toward the private sector, then it is a private bond.

Transportation revenue bonds

Municipalities or other relevant authorities issue transportation revenue bonds to subsidize local transportation projects such as buses, toll roads, toll gates, subway systems, etc.

They are usually paid for by the revenue earned from the transportation system that they subsidize.

However, they may also be repaid through taxes that were generated in the area that the transportation system serves or another pledge.

Education revenue bonds

Education revenue bonds are issued to subsidize higher-education projects.

This includes the construction of higher-education facilities such as public and private colleges. They can also be utilized to improve said facilities.

Revenue from these projects partially comes from the tuition payment that students make. The educational institution itself may also have other revenue sources.

Hospital revenue bonds

Hospital revenue bonds are issued to support the construction and/or improvement of hospitals, nursing homes, medical centers, healthcare facilities, or other similar/related facilities.

This also supports the purpose of new equipment for the use of these facilities.

These facilities often generate the majority of their revenues through reimbursements for services.

They could come from commercial insurers, commercially insured patients, those that use Medicare and Medicaid, or patients who self-pay.

Industrial revenue bonds

On behalf of a private sector company, a government agency may issue industrial revenue bonds (IRBs) to build or acquire factories and/or other industrial equipment.

A portion of the revenue that the private sector company produces will be used to repay the bonds.

Mortgage revenue bonds

It is the Housing Financing Agencies (HFA) that issue mortgage revenue bonds (MRBs).

MRS, a.k.a. housing bonds, are utilized to finance affordable mortgage options for low- and middle-income people. MRBs are usually tax-free.

Utility revenue bonds

Utility revenue bonds (a.k.a. essential services bonds) are issued to finance public utility projects such as water utility facilities, power electric utility facilities, etc.

Since these bonds are tied to essential services, they are generally less risky than other revenue bonds.