 Personal Finance PowerPoint Presentation, Revenue Bond. Prepare to get financially fit by practicing personal finance. Most of this information can be found at Investopedia Revenue Bond, which you can find online. Take a look at the references, resources, continue your research from there. This is by James Chen, updated February 27, 2021. In prior presentations, we've been taking a look at investment goals, investment strategies, investment tools, keeping them in mind. We're now looking at what is a revenue bond? A revenue bond is a category of municipal bond supported by the revenue from a specific project such as a toll bridge, highway, or local stadium. Revenue bonds that finance income producing projects are thus secured by a specific revenue source. So now we've got the investment. We could think of it as a bond. We're investing in the bond, the bond being in essence kind of like a loan. We're loaning money and expecting then to get the money back at some point in the future. It's an investment because we also expect to get revenue on it in the form of interest in a similar way as if we were, say, to rent out property. For example, we expect to get the property back at the end and get rental income for the use of the property. In this case, interest in essence being rental income for the use of the borrowed funds. And the borrowed funds, we expect to be paid back through the source of the revenue that the funds were used to produce because they were put into a revenue producing item. Note that when we give money, say, to the federal government, it's not always the case that they are investing, of course, in revenue producing items. Typically, when we give money, say, to the federal government, obviously the key thing that we're looking for is protection oftentimes to have the military to make sure that we're safeguarded and we're protected and we can do our own business. That's not really a revenue producing item, although it allows us to produce our own revenue. Whereas they might invest in other things which are revenue producing and then you could think about that revenue production like a toll bridge or something like that, which can support then the bonds that were used to fund it or the loan to get the thing going. So typically revenue bonds can be issued by the government agency or fund that is managed in the manner of a business such as entities having both operating and expenses. So when you think about basically the government side of things and like fund accounting, for example, again, you might have some types of businesses or government accounting or funds that don't have the revenue component. We're investing in something on the government level that doesn't have the revenue component, but obviously if we're investing in something and the fund does have a revenue component to it such as a toll bridge or something like that, then you treat that a little bit differently from an accounting perspective and possibly from a financing or funding perspective in terms of thinking how you might get the funding upfront to produce it through possibly being able to pay that back through the revenue generation in a similar fashion as you might see for a for-profit kind of organization, although often done a lot less efficiency efficiently because it's still a government not-for-profit entity. But in any case, revenue bonds which are also called municipal revenue bonds differ from general obligation bonds, go bonds that can be repaid through a variety of tax sources. Understanding revenue bonds, a revenue bond repays creditors from income generated by the project that the bond itself is funding. So you're giving money to fund basically a project instead of it going into the general kind of fund such as a toll road or bridge. So while a revenue bond is backed by a specific revenue stream, holders of go bonds are relying on the full faith and credit of the issuing municipality. So then you're going to be asking, well, me as the person loaning the money, what's the security that I have that I'm going to be paid back for it? Do I have the full credit and faith or is it dependent, of course, on the revenue of what you're using the funds specifically for? Typically, since holders of revenue bonds can only rely on the specific project's income, it is a higher risk than go bonds. So go bonds are got less risk, higher risk on the revenue bonds, and pays a higher rate of interest. So remember that any time, of course, we are taking on more risk than given market conditions, you would expect to get a higher return. If I wasn't getting a higher return, I would invest in some other kind of bond that has a lower risk if it had an equal return. So we've got this relationship between, of course, the risk and the return because hopefully the market is smart and understands higher risks should then entail higher returns. Therefore, if you're going to put me in a higher risk position, the market is going to demand higher returns. Broadly, several types of revenue bonds are commonly issued by state and local governments. So you've got an airport revenue bond as a type of municipal bond issued by municipality or airport authority that uses the revenues of the airport facility to back the bond. In some cases, the airport revenue bond is a type of public purpose bond. However, if more than 10% of the benefit from the airport will go to the private sector, the bond will be private bond. So a toll revenue bond is a type of municipal security used to build a public project such as a bridge, tunnel, or expressway. Revenues from tolls paid by users of the public project pay the principal and interest payments on the bond. Utility revenue bonds, essential services bonds are municipal debt securities that are designed to finance public utility projects. The utility is required to repay bondholders directly from the project revenues rather than a general tax fund. So a hospital revenue bond is a type of municipal bond intended to support the construction of a new hospital, nursing homes, or related facilities. The bonds can also be used to purchase new equipment for these facilities or to finance upgrades for existing hospitals. The revenue created by the hospitals is then used to repay bondholders. Mortgage revenue bonds, those are the MRBs, are bonds issued by a local or state housing finance agency, HFA's, also known as housing bonds. The HFA will issue tax free bonds to investors, funding from the sale of these bonds is then used to finance affordable mortgages for low and middle income people. Industrial revenue bonds IRBs are municipal debt securities issued by a government agency on behalf of a private sector company and intended to build or acquire factories or other heavy equipment and tools. Structure of revenue bonds, typically revenue bonds mature in 20 to 30 years, you get a longer kind of term structure and can be issued in various increments, including $1,000. So the actual bond that you're going to be paying then for them or the, you know, the face amount of the bond, $1,000 and $5,000. The value of the bond is called the bonds face value, which is the amount paid to the investor or bondholder at the bonds maturity. So the face amount, I mean, if you thought of it kind of like as a loan, you'd be paying, you know, the $1,000 or the $5,000, you'd possibly be gaining interest on it. And then at the end, you get your $1,000 or $5,000 back, although of course it's a bond. So you could have situations where the bond is issued at a premium or discount for something that you actually pay for it less than the $1,000 or greater than the $1,000. For example, even though that is the face amount, the amount that you'll be paid at the maturity of the bond. So some revenue bonds have staggered maturity dates and do not mature at the same time. These are known as serial bonds. So you might try to try to have serial bonds with that staggering kind of on purpose so that you have possibly like a more diversification in terms of when the maturity dates become due as one common kind of strategy. So investors can purchase a revenue bond by paying the face value amount of the bond upfront and in return are paid interest over the life of the bond. So that's kind of the, you're loaning money, you're going to earn basically to rent on the money you earned, that's going to be the interest. At the bond's maturity, the end of the bond, when it becomes due, the face value amount is returned to the investor provided there was sufficient revenue from the project to pay the bond, pay back the bond. So hopefully if everything goes well, they give you the money back, the face amount of the bond at the maturity, which you have already been earning interest on periodically. If there's insufficient revenue generated from the project, investors are at risk of losing their total investment. So the toll bridge burns down, not a good thing or some really rich billionaire needs to tear down your toll bridge because they want to drive their yacht through the place. So toll bridge has to go, that could be a problem. So for example, if a revenue bond is issued to build a new toll road, the tolls that are collected from the motorist who drive on the road would be used to pay off the bond after the building expenses have been paid. So a primary reason for using revenue bonds is that they allow the municipality to avoid reaching legislated bond debt limits. An agency that is run solely on tax dollars such as public schools cannot issue revenue bonds since these entities would be unable to pay off the bond using revenues from the specific project. Real life example, St. Louis, Missouri engages in tax exempt revenue bond financing. Typical projects funded this way are multifamily housing in which a minimum of 20% of the units are set aside for households meeting income guidelines, publicly owned facilities, pollution control facilities, and various fixed assets such as land building. So these kind of bonds are interesting to kind of look at and you might be looking at them in your local area. It's interesting to see what they're actually kind of doing on this. So things like the low income housing kind of things you really want to be careful in terms of how they're structuring that because oftentimes if they're not structured well, the long term effect tends to be a slum projects and so on. So these kind of things are, you want to make sure that you have a, if you're looking to help things out, make sure you're actually doing something that's actually helping things out in the long term I would look into. So the maturity of most of these issues is 20 to 30 years and interest earned is generally tax exempt from federal and most state income taxes. This also allows the issuer to pay a lower interest rate New York's Metropolitan Transportation Authority, the MTA decided to offer green bonds in February 2016. The MTA is using the $500 million of proceeds to pay planned infrastructure renewable projects, including upgrades to its railroads. So the bonds issued under MTA's transportation revenue bond are backed by the agency's operation revenue subsidies revenue from New York State. Again, these things, when you get into the green energy, when you get into things like putting in a metro or something like that, or say like a monorail. You know, I always think about back to that Simpsons episode where the guy came in and is like, we're going to build a monorail. You know, and you're like, okay, I mean, does it actually fit? I mean, it might. But I mean, again, if you're putting your money into these projects, you want to make sure that they're actually going to be benefiting taken into actual economics and play not only just for the short run, but for the long run.