NASAA Series 66 Uniform Combined State Law ExaminationInvestment Vehicle CharacteristicsMedium
A portfolio manager is considering investing in a bond that is backed by a specific stream of revenue from a project, such as tolls from a turnpike or user fees from a water system. The bond's creditworthiness is primarily dependent on the success and revenue generation of this specific project. Which type of municipal bond is this?
- ARevenue Bond
- BSpecial Assessment Bond
- CGeneral Obligation Bond
- DIndustrial Development Bond
Show answer & explanationAnswer & explanation
Correct answer: A. Revenue Bond
Revenue bonds are municipal bonds backed by the revenue generated from a specific project or facility, such as tolls, user fees, or lease payments. Their credit quality depends on the project's ability to generate sufficient revenue.
Why the other options are wrong
- B. Special Assessment Bonds are repaid from assessments on properties that benefit from a specific improvement, not from project-generated revenue.
- C. General Obligation (GO) bonds are backed by the full faith and credit and taxing power of the issuing municipality.
- D. Industrial Development Bonds (IDBs) are a type of revenue bond issued by a municipality for the benefit of a private corporation.
Revenue Bond
A municipal bond whose principal and interest payments are secured by the revenues generated from a specific project or facility, rather than the general taxing power of the issuer.
- Backed by specific project revenues (e.g., tolls, fees)
- Creditworthiness tied to project success
- Issued by states, municipalities, or authorities
- Used to finance specific public projects
Memory trick: Muni bonds build communities; 'revenue' bonds pay from specific projects.