Revenue bond
A revenue bond is a municipal bond repaid from the income generated by a specific project or facility — such as tolls, utility charges, or airport fees — rather than from the issuer's taxing power.
A revenue bond is a type of municipal bond backed by the cash flow of a specific revenue-producing project rather than by taxes. Toll roads, water and sewer systems, airports, hospitals, and stadiums are classic examples: the facility's user fees service the debt. This distinguishes revenue bonds from general obligation (GO) bonds, which are backed by the issuer's full faith, credit, and taxing power.
Because bondholders can look only to the project's earnings, analysts focus on whether revenues will cover operations and debt service. Before issuance, an independent feasibility study projects the facility's earning power, and the bond contract (trust indenture) typically includes protective covenants — a rate covenant promising to keep user fees high enough, along with maintenance and insurance covenants. A key metric is the debt service coverage ratio, comparing net revenues to required principal and interest payments.
Revenue bonds don't require voter approval, since no tax dollars are pledged, and they aren't constrained by statutory debt limits. That flexibility comes with more credit risk than a comparable GO bond, so revenue bonds generally offer higher yields. A hybrid exists too: a double-barreled bond is backed first by project revenues and additionally by the issuer's taxing power, and it's treated as a GO bond for analysis.
Municipal debt is a major topic on the securities exams. The Series 7 tests revenue bond types and covenants in depth, while the SIE and Series 65 cover how revenue bonds differ from GO bonds in backing, approval requirements, and risk.
Key takeaways
- Revenue bonds are municipal bonds repaid from a specific project's income, not from taxes.
- They require a feasibility study and protective covenants instead of voter approval.
- They generally carry more credit risk — and higher yields — than general obligation bonds from the same issuer.
- A double-barreled bond is backed by both project revenues and taxing power, and is analyzed as a GO bond.