1

Municipal bonds are of two kinds: GO (General Obligation) Bonds or Revenue Bonds. My question on Revenue Bonds is: are the revenues from the specific project secured or can the local government use those revenues for other purposes without paying the bond holders?

If the revenue from the project performs badly the revenue bond defaults. In this sense revenue bonds are more risky than general obligation bonds. However, my question is if the opposite is true. If the revenue of the project performs well but the local government is in deep trouble can it default on the revenue bond?

Improve this question
2
  • 2
    I suspect this varies by jurisdiction (which you haven't specified), and perhaps by what the specific bond language says. You might need to be more specific to get an answer about specific bonds you're looking at.
    – user42405
    Sep 20, 2019 at 17:12
  • @PeterCooperJr. If you are right and can show an example where the answer was yes and an example where the answer was no, that would be a great answer. :)
    – nanoman
    Sep 20, 2019 at 18:00

1 Answer 1

Reset to default
1

From Wikipedia:

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.

I would presume it's more common for the revenue stream to dry up than it is for the issuing municipality to go bankrupt, but that's just a guess.

Improve this answer
4
  • 1
    Indeed if the revenue from the project performs badly the revenue bond defaults. In this sense revenue bonds are more risky than general obligation bonds. However, my question is if the opposite is true. If the revenue of the project performs well but the local government is in deep trouble can it default on the revenue bond?
    – JorgeT
    Sep 20, 2019 at 18:37
  • No - per the quote, "other revenues (notably tax revenues) and the general credit of the issuing agency are not so encumbered". So it has no obligation and therefore cannot "default"
    – D Stanley
    Sep 20, 2019 at 19:08
  • 1
    @DStanley I think what the OP is asking, can the municipality just decide not to pay the bonds, even if they have plenty of monies coming from the revenue stream listed.
    – Vality
    Sep 20, 2019 at 20:41
  • @Vality Not legally. It would face a massive lawsuit from bondholders.
    – D Stanley
    Sep 20, 2019 at 21:30

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .