Revenue

Lesson

Revenue bonds are a type of municipal bond. Municipalities issue revenue bonds to finance specific projects, such as infrastructure improvements or public utilities. The interest and principal payments on these bonds are funded by the project's revenues rather than taxes.

Practice Question #1

Which of the following best describes revenue bonds?

A) Bonds issued by corporations to finance projects

B) Municipal bonds backed by the full faith and credit of the issuer

C) Municipal bonds issued to finance specific projects, with payments funded by project revenues

D) Debt securities issued by the federal government

Select an option above to see an explanation here.

A) Corporations, not municipalities issue corporate bonds. B) General obligation bonds are backed by the full faith and credit of the issuer, not revenue bonds. C) Revenue bonds are municipal bonds issued to finance specific projects, with interest and principal payments funded by the project's revenues. D) the federal government, not municipalities, issues Treasury bonds.

Terms

Revenue bonds:: Municipal bonds issued to finance specific projects, with interest and principal payments funded by the project's revenues.

Practice Question #2

What is the primary source of funds for interest and principal payments on revenue bonds?

A) Taxes

B) Corporate revenues

C) Project revenues

D) Federal government subsidies

Select an option above to see an explanation here.

A) Taxes are the primary source of funds for general obligation bonds, not revenue bonds. B) Corporate revenues are the primary source of funds for corporate bonds, not revenue bonds. C) Project revenues are the primary source of funds for interest and principal payments on revenue bonds. D) Federal government subsidies are not the primary source of revenue bond funds.

Do Not Confuse With

General obligation bonds:: Municipal bonds backed by the full faith and credit of the issuing municipality, with interest and principal payments funded by taxes.

Practice Question #3

Which financial ratio measures a project's ability to generate enough revenue to cover its debt service on revenue bonds?

A) Current ratio

B) Debt-to-equity ratio

C) Coverage ratio

D) Price-to-earnings ratio

Select an option above to see an explanation here.

A) The current ratio measures a company's ability to pay its short-term liabilities, not a project's ability to cover debt service. B) The debt-to-equity ratio measures a company's financial leverage, not a project's ability to cover debt service. C) The coverage ratio measures a project's ability to generate enough revenue to cover its debt service on revenue bonds. D) The price-to-earnings ratio measures a company's valuation, not a project's ability to cover debt service.

Historical Example

In the 1970s, a city issued revenue bonds to finance the construction of a new toll bridge. The bridge generated enough revenue from tolls to cover the interest and principal payments on the bonds, and the project was considered a success.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

A local government issues revenue bonds to fund the construction of a new water treatment plant. The plant generates revenue by charging residents for water usage, which is used to make interest and principal payments on the bonds.