Definition
Revenue Bonds refer to loans where both the principal and interest are repaid from the income generated by the project which the bonds are issued to finance. This style of bond commonly pops up in the U.S. on the municipal level, financing all manner of community embellishments like our beloved toll bridges, public utilities, or stadiums.
Understanding Revenue Bonds
When a city decides it wants a shiny new bridge but prefers not to dip into the taxpayers’ wallets directly, they can issue these special types of bonds. Investors lend money to the project and are paid back from the money made by the project - say, tolls from the bridge. No tolls collected? Brace yourself for a credit risk drama worthy of a daytime soap opera.
Economic Impact
Revenue bonds are a critical tool for municipal finance. They allow cities to undertake major projects without directly burdening local taxpayers (initially, at least). Economically, they can be interesting gambles: they’re only as good as the project they fund. If the project flops financially, bondholders might find their returns stuck in a quagmire.
Risks Involved
Investors, don your helmets! While revenue bonds often offer higher yields compared to general obligation bonds, they come with the caveat emptor badge. Why? Well, their return entirely hinges on the success of the project they’re funding. No successful project, no yield—simple but brutal economics.
Opportunities
For the optimistic investor who enjoys a dash of municipal theater, revenue bonds offer a chance to bet on public projects. Successfully chosen, these can yield fruitier returns than a stockpile of municipal “general obligation” bonds.
Related Terms
- Municipal Bonds: Broad category that includes revenue bonds, often used for funding public projects through investor capital.
- General Obligation Bonds: Supported by the full financial power of the issuing body, unlike revenue bonds which depend on specific project revenue.
- Bond Yield: The earnings generated by a bond, a critical factor in determining its attractiveness to investors.
Further Studies
- “Public Finance and Public Policy” by Jonathan Gruber
- Dive deep into the mechanisms of public finance, including detailed sections on different types of municipal bonds.
- “The Fundamentals of Municipal Bonds” by SIFMA
- A comprehensive guide to understanding the nuances of municipal bond investments, including risks and benefits.
Embrace the thrilling world of revenue bonds, where your investment might just help build a bridge or break a bank. Either way, you’re in for an exhilarating ride!
