Bonds issued by municipalties, such as states, cities and counties where the money raised to pay off the bonds comes from a non-tax revenue source, are called revenue bonds.
Municipal Revenue Bonds
Municipal issuers could include transportation entities and others. Revenue bonds are rated and yield based on their own merit.
REVENUE BONDS are issued to obtain funds to construct bridges, tunnels, streets and
infrastructure, rapid transit, harbors, and parks.
Principal and interest for revenue bonds are paid from fees imposed on the users of
the facility for which the bond was issued.
A feasibility study is conducted before
a revenue bond is issued to determine
whether a project is necessary and
whether it can pay for itself.
In a specific municipality, a revenue bond is more risky than a GO bond, and thus
has a higher coupon because the only source of
payments for principal and interest is
the revenues of the facility
Investing in these municipal securities is normally based on the location of the issue, the tax bracket of the investor (for greater tax free yield), maturity and rating.
Types of Revenue Issues
Transportation - These bonds are issued backed by tolls, fees and other transportation collections.
Utility - These revenue bonds are secured by the income of a public utility.
Industrial - These municipal issues are backed by a corporation's payments back to the municipality.
Fees charged for water and sewer usage pay off USER FEE REVENUE BONDS.
Fees charged for the usage of highways, toll bridges, airports, and other projects pay off
TOLLS AND FEES BONDS.
SPECIAL TAX BONDS are issued for specific purposes, such as building or renewing
roads or rapid transit systems.
SPECIAL ASSESSMENT BONDS are issued to
generate money either to purchase
specific property or to construct facilities, such
as infrastructure in new housing areas, for
a specific group of users.
INDUSTRIAL DEVELOPMENT BONDS (IDBs) or
INDUSTRIAL DEVELOPMENT REVENUE BONDS (IDRs) are issued by a
municipality for a corporation for financing construction of such projects as pollution
control facilities, industrial parks, sports stadiums, airports, or educational facilities.
DOUBLE-BARRELED BONDS are
issued to generate funds to pay for a specific
facility. A double-barreled bond is both a revenue bond and a general obligation bond.
Revenue bonds should be invested based on the geographical area of the investor. Most states offer municipal buyers triple tax free treatment (no state, federal or local tax), if the investment is issued in the home state of the buyer. This will increase the overall tax free yield of the municipal bond investor.
Not every brokerage firm offers revenue bonds. The best selection will normally come from municipal bond brokers that hold inventory for these bonds. These securities are normally traded over the counter OTC between broker to broker. There is usually a mark up for these bonds, not a commission.
Municipal Bond Blog - Free investing and finance advice related to the muni market.
G.O Bonds are generally more secure because they are secured by taxes. Some municipalities will use a mix of taxes and revenue from a generating course.
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