Revenue Bond

A revenue bond is backed by:

1. A.Income from a specific project or facilityCorrect - project revenues service the debt.
2. B.The SECThe SEC regulates disclosure in the securities markets; it neither issues debt nor guarantees anyone's payments. No regulator stands behind a bond.
3. C.FDIC insuranceFDIC coverage reaches bank deposits, and a municipal bond is a security rather than a deposit. Buying one means accepting the issuer's credit with no insurance fund standing behind it.
4. D.The issuer's taxing powerThis describes the general obligation bond, the revenue bond's counterpart. The defining feature of a revenue bond is precisely that it does not reach general tax revenues; it rises or falls on what its own project collects.

Why: Revenue bonds are supported by income generated by a specific project or facility.

Which of the following projects would most typically be financed with a municipal revenue bond?

1. A.A new county courthouse open to the public at no chargeA courthouse produces no user revenue, so it is normally financed with general obligation debt supported by taxes.
2. B.A municipal water and sewer system funded by user feesCorrect. The system charges the users who benefit, and those fees are pledged to the bonds.
3. C.A public elementary school buildingPublic schools charge no tuition and therefore generate no pledgeable revenue stream, so school construction is typically GO financed.
4. D.Ongoing salaries for a city police departmentOperating salaries are funded from the general budget, not from long-term project financing of any kind.

Why: Revenue bonds finance facilities that generate their own income stream from the users who benefit. A municipal water and sewer system charges user fees, and those fees are pledged to pay the bonds.

The Calderwood Regional Sewer District issues bonds that are payable first from the net revenues of the sewer system and, if those revenues prove insufficient, from the unlimited ad valorem taxing power of Calderwood County. This security is best described as:

1. A.A pure revenue bond, because sewer system revenues are the first source of payment.Incorrect. A pure revenue bond has ONLY the project revenue stream behind it. Here a general government has pledged its taxing power as a second source.
2. B.A double-barreled bond.Correct. Two legally binding sources of payment - project revenues plus the county's unlimited ad valorem taxing power - is the definition of a double-barreled bond, and it is generally analyzed as a general obligation credit.
3. C.An industrial development revenue bond backed by a corporate lessee.Incorrect. An industrial development bond is repaid by a private corporate lessee, not by a public sewer system's revenues and a county tax pledge.
4. D.A moral obligation bond, because the county's support is discretionary.Incorrect. In a moral obligation structure the legislature MAY appropriate funds but is not required to. Here the ad valorem tax pledge is legally binding.

Why: A bond with two distinct and legally enforceable sources of payment - a project revenue stream plus the full faith, credit and taxing power of a general purpose government - is a double-barreled bond. Because the taxing pledge is a genuine backstop rather than a courtesy, these bonds are generally analyzed and rated as general obligation credits and usually carry lower yields than a comparable pure revenue bond.

A revenue bond differs from a general obligation bond because it is backed by...

1. A.The issuer's common stockMunicipalities do not issue stock.
2. B.The revenue of the specific project it financesCorrect — revenue bonds rely on project income, not taxing power.
3. C.The U.S. TreasuryMunicipal bonds are not backed by the federal government.
4. D.The full faith, credit, and taxing power of the municipalityThat backs a general obligation bond, not a revenue bond.

Why: A revenue bond is backed only by the income of the specific project it finances, with no claim on the issuer's general taxing power.