Investing doesn’t have to be as complicated as you might think it is. The biggest thing to remember is the tradeoff between risk and reward. I explain it in depth here. Today, let’s talk about one of the most conservative investments that there is, revenue bonds.
What is a Revenue Bond?
A revenue bond is a type of municipal bond. They are usually issued by municipalities (cities, towns, counties, etc.). However, they can also be issued by states and provinces as well.
While a GO bond is backed by the “full faith and credit” of the municipality (meaning that they are repaid through taxes from the people in that municipality), revenue bonds are repaid by the revenue that the revenue structure(s) that the bonds pay for.
What does this mean?
Basically, it works like this:
A town is growing rapidly and needs more water for its residents. So the town needs to build a new water treatment plant to fill that need.
The town will likely not have the money to build the plant outright. So they will need to issue bonds so that they can have the money to build the water treatment plant.
The bondholders are then paid back by the revenue that the water treatment plant brings in (hence the name, revenue bond).
Revenue bonds can be issued to support the building and development of several different projects. However, it is important to understand that these projects MUST bring in revenue to pay for the bond. If they do not bring in revenue, then they would likely be issued as GO bonds and repaid by the taxpayer.
Some examples of revenue bond projects are:
- Colleges
- Utilities
- Sewer projects
- Water treatment plants
- Updated power grids
- Wind farms
- Solar farms
- Etc.
- Airports
- Toll Roads
- Hospitals
- Mortgage Bonds
Benefits and Drawbacks of Revenue Bonds
Probably the biggest benefit of revenue bonds are the same as GO bonds in that they are generally tax free. That is the primary reason that people set out to buy municipal bonds (either GO bonds or revenue bonds).
However there are some other benefits as well.
- They are low risk investments.
- They offer long maturities (if that is something that interests you).
- They are included in most retirement plans.
- They are generally tax free.
The drawbacks for revenue bonds include:
- The low rate of return that you get may not be what you want.
- Generally, they must be purchased in at least $1,000 increments.
Final Thoughts
Revenue bonds can be a good investment for some people but a terrible one for others. There is nothing inherently wrong with them. Just like with any investment, you need to understand what you are investing in and WHY you are investing in it.
Investing is like trying new food. Some flavors aren’t going to be for you, some are.
But if you want to help your (or any) local community with infrastructure projects that can help that community all while getting some nice tax incentives, revenue bonds might be up your ally.
I am here to help you!
You can do this!
Until next time!
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