NASAA Series 66 Uniform Combined State Law ExaminationInvestment Vehicle CharacteristicsMedium
A portfolio manager is analyzing a bond issued by a municipal utility district. The bond's interest payments are secured by the revenues generated from the operation of the utility, such as water and sewer fees. Which type of municipal bond is this?
- AIndustrial Development Bond (IDB)
- BGeneral Obligation (GO) Bond
- CRevenue Bond
- DMoral Obligation Bond
Show answer & explanationAnswer & explanation
Correct answer: C. Revenue Bond
Revenue bonds are municipal bonds backed by the revenues generated from a specific project or facility, such as a utility, toll road, or airport. The interest payments and principal repayment depend solely on these project-specific revenues. General Obligation bonds are backed by the full faith and credit (taxing power) of the issuer, while Moral Obligation and Industrial Development Bonds have different specific backing mechanisms.
Why the other options are wrong
- A. Industrial Development Bonds (IDBs) are a type of revenue bond used to finance commercial projects for private corporations, with payments secured by the private user, not a municipal utility's revenues directly.
- B. General Obligation bonds are backed by the full faith and credit and taxing power of the issuing municipality, not specific project revenues.
- D. Moral Obligation bonds are not legally binding obligations of the issuer but are backed by a legislative pledge to make up shortfalls, which is a weaker form of backing.
Revenue Bond
A municipal bond whose debt service (interest and principal payments) is payable solely from the revenues generated by the specific project or facility it finances.
- Backed by user fees, tolls, or other operational revenues.
- Not backed by the full faith and credit (taxing power) of the municipality.
- Often used to finance public utilities, airports, hospitals.
- Generally carry higher risk than GO bonds due to reliance on project success.
Memory trick: Revenue bonds rely on project earnings, GO bonds on taxes.