This write-up provides insight into all that revenue bonds entail. This includes their definition, their scope, the types of revenue bonds that exist, and their inherent characteristic traits.
What is a Revenue Bond?
In order to understand a revenue bond’s definition, it is important to understand that they are a form of municipal bonds. They are propped up by revenue derived from certain projects which may range from highways and local stadiums to toll bridges. Owing to the fact that these bonds help fund income-generating projects, they are harnessed by an outlined revenue source. Ordinarily, these bonds may be issued by any governmental agency or fund that is governed in the form of a business. This could be an entity that has both operating revenues in addition to expenses. With the aid of a revenue bond, it is possible for government entities to cut short their expenditures on varied infrastructure projects. In addition to the projects mentioned above, funds from revenue bonds may also be funneled towards the construction of airports and sewer
Understanding the Scope of Revenue Bonds
Revenue bonds must not be confused with other forms of municipal bonds which are known as general obligation (or GO) bonds. The repayment required from general obligation bonds is made possible via revenues created by an entity which includes the tax revenue they secure. Therefore, while revenue bonds are upheld via a specific source of revenue, investors who hold general obligation bonds are beholden to and dependent on the municipality responsible for issuing the same. They put not just their trust but credit in the hands of the issuer. Ordinarily, owing to the fact that investors of revenue bonds are solely reliant on the outlined project’s income, they stand a higher risk in comparison to general obligation bonds. That being said, they pay a higher rate of interest.
Types of Revenue Bonds
There broadly exist a wide variety of revenue bonds issued by a state as well as local governments. They can be understood to exist in the following ways.
Airport Revenue Bonds – This form of a municipal bond is issued via a municipality or airport authority. Revenue generated via the airport itself is used to propel the bond forward. On occasion, however, this bond may serve as a public-purpose bond. Should more than 10 percent of the profits generated via the airport be funneled towards the private sector, the bond will be classified as a private bond.
Toll Revenue Bonds – This form of a municipal bond is used to direct revenue towards the construction of a public project. This can take the form of a bridge, expressway or tunnel. Revenue is generated via tolls paid by those that use the public project. This revenue is used to pay the principal and interest payments applicable to the bond.
Utility Revenue Bonds – This form of a bond falls under essential services bonds owed to the vital services provided via the funds paid by investors. With the aid of these municipal debt securities, varied public utility projects can be financed. The utility is meant to repay holders of these bonds directly via the revenue generated from the project as opposed to a general tax fund.
Hospital Revenue Bonds – This form of a municipal bond is meant to aid the construction of new hospitals, nursing homes, or associated buildings. The funds from these bonds may also be allocated towards purchasing new equipment for these medical buildings or can be used to fund upgrades within existing hospitals. Revenue generated via these hospitals is directed towards payments to bondholders.
Mortgage Revenue Bonds (or Housing Bonds) – These bonds are issued by a state or locally authorized housing finance agencies. These bonds are issued on a tax-free basis to investors. Funds generated via the sale of these bonds are directed towards providing affordable mortgages to those who belong to low and middle-income categories.
Industrial Revenue Bonds – These municipal debt securities are issued by an agency of the government for a private sector company. Funds generated via these bonds are directed towards building or acquiring factories or are used to purchase varied forms of heavy equipment and implements.
Characteristics of Revenue Bonds
Revenue bonds can be understood to display the following characteristics.
Extended period for maturity
They require longer time frames to mature owing to the fact that they are used to fund long-term projects. Ordinarily, the maturity dates for these bonds may range from a period of 20 to 30 years. Additionally, there exists a face value amounting to USD 1000 or USD 5000 on the same. Interest and principal payments made to bondholders are made via the operating revenues from the project in question. In the event that a project does not generate sufficient revenue required to make payments, these payments can be deferred to a later point in time.
Bondholder’s avail of potentially greater returns in comparison to general obligation bonds
Those that seek to invest in revenue bonds are provided with potentially higher returns in comparison to those that invest in general obligation bonds for the most part. The chances of higher returns are owed to a number of reasons. For starters, there exists a greater possibility of investors not being repaid owing to the fact that the bond’s only security exists in the form of revenue generated via the project in question. Moving on, revenue bonds don’t provide investors with claims on the assets of the project under consideration should the project not generate funds that were originally anticipated. Finally, these bonds are laden with provisions that issuers may make use of should the project’s assets be destroyed in case of a natural calamity or other catastrophic events.
Individuals must read the policy details carefully prior to investing in a given security. Serving as a form of municipal bonds, revenue bonds can be allocated for a wide array of projects.