Revenue Bonds

Definition

The financial accounting term revenue bond refers to a debt security that guarantees repayment, and is secured, by a specific income-generating entity.  Revenue bonds are a subset of municipal bonds and are typically issued with a face value of $5,000, with maturities of 20 to 30 years.

As is the case with other debt, if the bond is issued for a term of five years or more, they represent a long term obligation and are shown in the long term liabilities section of the balance sheet.

Explanation

Issuing long-term bonds represents an important source of financing for many municipalities.  Revenue bonds are typically issued by local governments to build, expand, or replace assets that also generate income.  For example, this type of bond could be used to finance projects such as:

  • Bridges, toll roads, and tunnels
  • Municipal utilities (water, sewer)
  • Airports, ports, parking lots, and mass transit systems
  • Stadiums, hospitals and low income housing units

The fees, tolls, fares, rents, concessions, lease payments and other charges associated with these projects are the source of income used to pay bondholders.

Unlike general obligation securities, which are backed by the full faith and credit of the issuing municipality, revenue bonds are secured by the income-producing project.  For this reason, they typically pay a higher rate of interest than general obligation bonds.  Investors need to evaluate the potential long-term cash flow of the project before purchase.

While maturities oftentimes include terms of 20 to 30 years, these securities may be issued as serial bonds, which have a sequence of maturity dates.  Finally, for those taxpayers residing in the issuing state, municipal bonds are typically free from state and local income taxes.

Related Terms

liabilities, long-term liabilities, interest expense, deep discount bonds, income bondsgeneral obligation bonds, agency securities