A revenue bond is a type of municipal bond in which the debt service (principal and interest) is paid exclusively from revenues generated by the specific project financed by the bond — tolls, utility fees, airport landing fees, hospital charges, or similar enterprise income. Unlike general obligation bonds, revenue bonds are not backed by the issuer's taxing power, so the creditworthiness of the bond depends entirely on the financial viability of the underlying project.
Revenue bonds are issued by special authorities, public enterprises, and conduit borrowers. Common types include water and sewer revenue bonds, toll road/bridge bonds, airport bonds, hospital bonds, university revenue bonds, and industrial development bonds (IDBs) / private activity bonds. IDBs finance facilities leased to private corporations — interest on some IDBs may be subject to the Alternative Minimum Tax (AMT).
Key protective provisions in revenue bond indentures include rate covenants (obligating the issuer to set rates sufficient to cover debt service), additional bonds tests (restricting issuance of new bonds unless revenue coverage is adequate), reserve funds (debt service reserve funds required to hold one year of debt service), and flow-of-funds provisions.
Revenue bonds generally carry higher yields than comparable GO bonds to compensate for the absence of taxing power. Their creditworthiness is analyzed using coverage ratios (net revenues available ÷ annual debt service).
> Exam tip: On the Series 7 and MSRB-tested exams, know that revenue bonds are backed ONLY by project revenues, not taxes. Remember that some private activity bonds are AMT preference items. The Series 7 frequently tests the difference between GO and revenue bonds, and the specific covenants in a revenue bond indenture.