Revenue Bonds

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on September 01, 2023

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Definition of Revenue Bonds

Revenue bonds is a type of municipal bond that is issued by government entities to finance public projects, such as infrastructure developments, utilities, or transportation systems.

The principal and interest payments of these bonds are secured by the revenues generated from the project itself, rather than from general tax revenues.

Purpose and Characteristics of Revenue Bonds

The primary purpose of revenue bonds is to provide financing for projects that generate income, thereby reducing the burden on taxpayers.

They are considered a form of self-liquidating debt, as the income generated from the project should be sufficient to repay the bondholders.

Revenue bonds often have a longer maturity than other types of municipal bonds and may be non-callable, which means that they cannot be redeemed before the maturity date.

Revenue Bonds vs. General Obligation Bonds

Revenue bonds differ from general obligation bonds, which are backed by the full faith and credit of the issuing government and its taxing authority.

While general obligation bonds are repaid through taxes, revenue bonds rely on the income generated by the specific project being financed.

Types of Revenue Bonds

Project Revenue Bonds

Project revenue bonds are issued to finance specific projects, such as toll roads, airports, or public housing developments. The revenue generated from these projects is used to repay the bondholders.

Lease Revenue Bonds

Lease revenue bonds are issued by a government entity to finance projects that will be leased to another public or private entity. The lessee makes lease payments to the issuer, which are then used to repay the bondholders.

Special Tax Bonds

Special tax bonds are backed by a specific tax or revenue source, such as sales tax, hotel occupancy tax, or gasoline tax. These bonds are used to finance projects that have a clear relationship to the designated tax or revenue source.

Industrial Development Revenue Bonds

Industrial development revenue bonds are issued to finance the construction or improvement of facilities for private businesses. The businesses then lease or purchase the facilities, and their payments are used to repay the bondholders.

Public Utility Revenue Bonds

Public utility revenue bonds are issued to finance the construction, expansion, or improvement of public utilities, such as water and sewer systems or electric power plants.

The revenue generated from these utilities is used to repay the bondholders.

Nonprofit Revenue Bonds

Nonprofit revenue bonds are issued to finance the construction or improvement of facilities for nonprofit organizations, such as hospitals, schools, or cultural institutions.

The revenue generated from these facilities is used to repay the bondholders.

Types of Revenue Bonds

Issuance and Sale of Revenue Bonds

Role of Underwriters and Financial Advisors

Underwriters and financial advisors play a crucial role in the issuance and sale of revenue bonds. They help structure the bond issue, price the bonds, and market them to potential investors.

Pricing and Interest Rates

The pricing of revenue bonds is determined by the creditworthiness of the issuer, the interest rate environment, and the specifics of the project being financed.

Interest rates on revenue bonds are generally higher than those on general obligation bonds, reflecting the higher risk associated with relying on project revenues for repayment.

Credit Ratings and Their Impact

Credit rating agencies assign ratings to revenue bonds based on their assessment of the issuer's creditworthiness and the financial feasibility of the project being financed.

Higher credit ratings typically result in lower interest rates, reducing the issuer's borrowing costs.

Primary and Secondary Markets

Revenue bonds are initially sold in the primary market, where underwriters purchase the bonds from the issuer and resell them to investors.

Once issued, revenue bonds can be bought and sold in the secondary market, where bond prices may fluctuate based on market conditions and changes in credit ratings.

Benefits of Revenue Bonds

Financing Public Projects

Revenue bonds provide an important source of funding for public projects that generate income, allowing governments to invest in infrastructure and other developments without increasing taxes.

Off-Balance-Sheet Financing

Since revenue bonds are repaid from project revenues rather than general tax revenues, they may not appear on a government's balance sheet as debt. This can help governments maintain a favorable debt-to-income ratio.

Lower Cost of Capital

By issuing revenue bonds, governments can access lower borrowing costs than they might through other forms of debt, such as bank loans or corporate bonds.

Stimulating Economic Growth

Investments in public projects financed by revenue bonds can stimulate economic growth by creating jobs, boosting local industries, and improving the overall quality of life for residents.

Risks of Revenue Bonds

Credit Risk

Credit risk refers to the possibility that the issuer may default on its principal or interest payments.

This risk is generally higher for revenue bonds compared to general obligation bonds, as repayment relies on the success of the specific project being financed.

Interest Rate Risk

Interest rate risk is the potential for bond prices to decrease as market interest rates rise. Since revenue bonds often have longer maturities than other types of municipal bonds, they may be more susceptible to interest rate fluctuations.

Market Risk

Market risk refers to the possibility of bond prices declining due to changes in investor sentiment, economic conditions, or other factors affecting the broader bond market.

Revenue bonds, like other fixed-income securities, are subject to this risk.

Regulatory Risk

Regulatory risk involves the potential for changes in government regulations or policies that may negatively impact the project being financed or the issuer's ability to repay bondholders.

This risk is particularly relevant for projects that are heavily regulated, such as utilities or transportation systems.

Tax Implications

Although interest income from revenue bonds is generally exempt from federal income taxes, it may be subject to state and local taxes.

Additionally, changes in tax laws or policies could affect the attractiveness of revenue bonds to investors.

Benefits and Risks of Revenue Bonds

Challenges and Criticisms of Revenue Bonds

Default Risk

The risk of default is higher for revenue bonds compared to general obligation bonds, as their repayment is dependent on the success of the specific project being financed.

This can make revenue bonds a riskier investment for bondholders.

Moral Hazard

Issuing revenue bonds can create a moral hazard for governments, as they may be more inclined to undertake risky projects knowing that the bondholders, rather than taxpayers, will bear the financial consequences if the project fails.

Transparency and Accountability Concerns

There may be concerns about the transparency and accountability of governments that issue revenue bonds, particularly when the financed projects involve partnerships with private entities.

Potential Misuse of Funds

There is a risk that governments may use revenue bond proceeds for purposes other than the intended project, potentially leading to financial mismanagement and increased default risk.

Case Studies of Revenue Bond Projects

Successful Revenue Bond Projects

Examples of successful revenue bond projects can help illustrate the benefits and best practices associated with this financing mechanism.

Failed Revenue Bond Projects

Examining failed revenue bond projects can provide valuable insights into the risks and challenges associated with this type of financing.

Lessons Learned From Case Studies

By analyzing both successful and failed revenue bond projects, governments and investors can learn important lessons to improve the effectiveness and efficiency of future revenue bond financing.

Future Outlook and Trends

Impact of Emerging Technologies on Revenue Bond Issuance

Emerging technologies, such as blockchain and digital currencies, may transform the issuance and trading of revenue bonds, potentially improving transparency, efficiency, and accessibility for investors.

Green Revenue Bonds and Sustainable Financing

Green revenue bonds, which finance projects with environmental benefits, are gaining popularity as governments and investors increasingly prioritize sustainability and climate resilience.

Public-Private Partnerships

Public-private partnerships are becoming more common in the financing of public projects, with revenue bonds playing a key role in facilitating these collaborations.

This trend is expected to continue, as governments seek innovative ways to finance essential infrastructure and services.

Globalization and Cross-Border Issuance of Revenue Bonds

As the global economy becomes increasingly interconnected, governments may look to issue revenue bonds in international markets, attracting foreign investment and diversifying their investor base.


Revenue bonds are an important financing tool for governments to fund public projects that generate income.

They offer various benefits, such as lower borrowing costs and off-balance-sheet financing, but also come with challenges and risks, such as default risk and potential misuse of funds.

Understanding the role of revenue bonds in public finance can help governments and investors make informed decisions when considering this type of financing for public projects.

To ensure the successful issuance and management of revenue bonds, governments should prioritize transparency and accountability, engage in thorough financial feasibility assessments, and collaborate with experienced underwriters and financial advisors.

Investors should carefully evaluate the risks and rewards associated with revenue bonds, considering factors such as credit ratings, interest rate risk, and the specifics of the projects being financed.

Revenue Bonds FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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