Revenue bond

A revenue bond is a special type of municipal bond distinguished by its guarantee of repayment solely from revenues generated by a specified revenue-generating entity associated with the purpose of the bonds, rather than from a tax. Unlike general obligation bonds, only the revenues specified in the legal contract between the bond holder and bond issuer are required to be used for repayment of the principal and interest of the bonds; other revenues (notably tax revenues) and the general credit of the issuing agency are not so encumbered. Because the pledge of security is not as great as that of general obligation bonds, revenue bonds may carry a slightly higher interest rate than G.O. bonds; however, they are usually considered the second-most secure type of municipal bonds.

Revenue bonds may be issued to construct or expand upon various revenue-generating entities, including:

Generally, any government agency or fund that is run like a business, generating operating revenues and expenses (sometimes known as an enterprise fund), can issue revenue bonds. An agency that provides a free service, such as a school, can not do so, as their only revenue is tax dollars.

The Supreme Court decision of Pollock v. Farmers' Loan & Trust Co. of 1895 initiated a wave or series of innovations for the financial services community in both tax-treatment and regulation from government. This specific case, according to a leading investment bank's research, resulted in the "intergovernmental tax immunity doctrine," ultimately leading to "tax-free status." The interest on municipal bonds is generally excludable from gross income for federal income tax purposes (however, capital gains or accruing market discount are not tax exempt); for these purposes, accruing original issue discount is also treated as "interest" which is excludable from gross income for federal income tax purposes. Some municipal bonds, are called "specified private activity bonds" and are preference items under the alternative minimum tax. Additionally, corporate taxpayers may need to include interest on otherwise tax exempt municipal bonds in a calculation base for purposes of the alternative minimum tax and other special taxes.

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