Revenue Bond
A revenue bond is a type of municipal bond whose principal and interest payments are secured solely by the revenues generated by a specific project or enterprise — such as a toll road, airport, water utility, or hospital — rather than by the full taxing authority of the issuing government entity.
Revenue bonds occupy the most commonly issued category within the U.S. tax-exempt municipal bond market, representing the majority of total municipal issuance by dollar volume. Unlike general obligation bonds, which pledge the issuer's full taxing power to debt repayment, revenue bonds are non-recourse to the broader governmental entity. If the enterprise generating the pledged revenues fails to produce sufficient cash flow, bondholders must rely on their security interest in those project revenues — and typically in the project's physical assets — without recourse to other government resources.
The repayment structure of a revenue bond is governed by an indenture that defines the flow of funds: revenues are typically deposited into a general fund, then disbursed in a waterfall sequence that first covers operating and maintenance costs, then debt service (principal and interest), then reserve fund replenishment, and finally distributions to the issuer's general fund. This waterfall structure is central to bondholder protection: by ensuring debt service is paid before the issuer captures residual project revenues, the structure creates contractual prioritization for bondholder repayment.
Revenue bond sectors vary widely in risk and credit quality. Airport revenue bonds issued by major hub airports — such as those serving New York, Chicago, or Los Angeles — carry airline use-and-lease agreements that obligate airlines to pay fees sufficient to cover debt service regardless of enplanement volumes, providing strong bondholder protection. Water and sewer revenue bonds benefit from the essential-service nature of their revenues: customers continue paying utility bills even during economic downturns. Tobacco settlement bonds, by contrast, rely on state-level receipts from the 1998 Master Settlement Agreement with tobacco companies, a more volatile and litigation-sensitive revenue stream.
Credit rating agencies evaluate revenue bonds based on debt service coverage ratios (the ratio of net revenues to annual debt service), demand elasticity for the underlying service, competitive position, legal protections in the indenture, and management quality. Investment-grade revenue bonds typically carry coverage ratios comfortably above 1.20 times, with stronger credits maintaining coverage above 1.50 times.
For investors, revenue bonds generally offer modestly higher yields than equivalent-maturity general obligation bonds of the same rating because of their more limited security pledge. That spread compensation varies by sector — essential utility bonds trade closer to GO spreads, while bonds backed by more discretionary revenues trade wider. Interest on revenue bonds is generally exempt from federal income taxes and, for in-state purchasers, from state and local income taxes as well, making them attractive to high-income investors in taxable accounts.