What are Revenue Bonds?

Revenue bonds are a type of bond where the repayments are not simply taken from general government funds. Instead, at the least, the money comes from a specific agency. In most cases the money comes specifically from the revenue that results from the project funded by the bond's issue. Using revenue bonds can allow officials to fund a project without breaching general rules and limits on government debt.

A bond is a government-issued debt security product. Though it is technically a financial product bought by an investor, it effectively acts as a loan by the investor to the government. The bond can usually be redeemed on a set date at a premium to the initial price paid, with this premium effectively being the interest on the loan. Bonds can be sold between different investors before the redemption date. Government bonds are usually classed as a less risky type of security because, while a company may go out of business or refuse to repay its bonds, an established and stable government will virtually always repay bonds.

With some government bonds, the money raised goes into general government funds. These are known as general obligation bonds. The repayments also come out of general government funds, most commonly the money raised by taxes.

Revenue bonds work in a different way. The money raised will usually be allocated to a specific project. This could include road building, sewer works, a new stadium or any similar public spending project. The bonds are then repaid from the revenues that result, for example from road tolls, sewerage charges, stadium revenue or whatever the relevant revenue may be.

There are a couple of consequential differences between revenue bonds and general obligation bonds. One is that revenue bonds usually have a longer period before redemption. Rather than a few years, it will often be as long as 20 or 30 years. This is because it will likely take this time before the project begins to generate enough money to make repayments. Remember that officials cannot simply pay back the money from general funds.

Revenue bonds are also somewhat riskier than a general obligation bond. This is because there is a higher chance that the money will not be in place to repay the bond upon redemption. In such a situation, the issuing government will usually defer payment rather than simply refuse to pay it back. The risk of such a deferment means revenue bonds usually carry a higher rate of interest.