What is a critical feature of revenue bonds?

A critical feature of revenue bonds is that they are financed by a specific revenue source. This means that the bonds are repaid from the income generated by a particular project or stream of revenue, such as tolls from a toll road, fees from a utility service, or revenue from a specific facility. This characteristic distinguishes revenue bonds from general obligation bonds, which are backed by the full faith and credit of the issuing municipality and can be financed by a wider range of tax revenues.

The reliance on specific revenue streams adds a layer of risk, as the funds available to service the debt are dependent on the performance of the underlying project. This structure makes revenue bonds attractive for financing projects that are expected to generate stable and predictable cash flows, aligning the interests of investors with the success of those projects.

In contrast, collateral from the issuer is not a defining feature of revenue bonds, as they rely more on revenue generation than asset backing. While revenue bonds are often associated with municipal projects, they are not exclusively used for them; private entities can also issue revenue bonds. Federal grants may be available for some projects, but they are not a standard feature of revenue bonds themselves.