Revenue bonds refer to a type of U.S. municipal bonds issued for a specific project
and secured by a source of revenue as a result of the project’s implementation. An example of such projects is the construction of a toll road, airport, hospital, stadium, etc. These types of bonds are most often issued by government agencies and municipal funds that run operations.
Unlike with general obligation bonds
, the coupons and principal on revenue bonds cannot be paid out of the tax revenues of the issuer. If the cash flows generated by the project are insufficient to service the bonds, the investor is likely to be short of income. In addition, investors in revenue bonds may not claim the assets of the project in the event of insolvency.
Thus, the reliability of this type of bond is mainly determined not by the issuer’s creditworthiness, but by the profitability of the project. Accordingly, as a rule, the revenue bonds have a higher return than the general obligation bonds with similar parameters.