A revenue bond is repaid primarily from a specific project's, facility's, or enterprise's revenues rather than a broad general tax pledge.
A revenue bond is a bond repaid primarily from a specific project’s, facility’s, or enterprise’s revenues rather than from an issuer’s broad general tax pledge. In municipal finance, common repayment sources include tolls, utility charges, airport fees, hospital revenues, lease payments, housing project revenues, and other dedicated cash flows.
The revenue-bond label changes the evidence an investor should review. A strong city name does not automatically mean the city has pledged all available taxes to the bond. The official statement and bond documents define the repayment source, flow of funds, reserve requirements, rate covenants, additional bonds tests, and remedies if revenues fall short.
Revenue bonds can finance essential public services, but they can also expose investors to project-specific demand, pricing, regulation, construction, operating, and liquidity risks. The bond’s yield should be compared with those risks, the maturity, call protection, tax treatment, and recent trading levels.
| Feature | Revenue Bond | General Obligation Bond |
|---|---|---|
| Primary repayment source | Specified project, system, lease, or enterprise revenue. | Issuer’s broad taxing power or full-faith-and-credit pledge, depending on the bond. |
| Main credit question | Are pledged revenues sufficient and legally available for debt service? | Is the issuer’s tax base, fiscal condition, and legal authority strong enough? |
| Evidence to review | Official statement, pledged revenue history, coverage, covenants, reserves, and continuing disclosures. | Official statement, budget, tax base, debt burden, pension pressure, legal limits, and continuing disclosures. |
| Example | Toll-road revenue bond or water-system revenue bond. | City general obligation bond for public infrastructure. |
A toll authority issues bonds to finance an expansion. Debt service is expected to come from toll collections, not from the state’s general tax revenue. If traffic volume disappoints or toll increases become politically difficult, bondholder risk can rise even if the project is publicly owned.
| Check | Why it matters |
|---|---|
| Pledged revenue | Defines the cash flow available to pay principal and interest. |
| Debt-service coverage | Shows how much cushion exists between pledged revenues and required debt service. |
| Rate-setting authority | Determines whether the issuer can raise tolls, utility rates, rents, or fees. |
| Flow of funds | Shows payment priority among operating costs, senior debt, reserves, and subordinate debt. |
| Additional bonds test | Limits or allows future debt secured by the same revenues. |
| Reserve fund and liquidity | Provides cushion but does not eliminate credit risk. |
| Call and refunding terms | Can change expected holding-period return and reinvestment risk. |
| Tax status | Tax-exempt, taxable, and AMT-sensitive treatment can change after-tax yield. |