American Institute of Certified Planners (AICP) Practice Exam

What characteristic defines Revenue Bonds?

1. They are sold at lower interest rates

2. They are intended for funding operating budgets

3. They sell bonds at high interest rates for capital improvements

4. They require community approval for issuance

The correct answer is: They sell bonds at high interest rates for capital improvements

Revenue bonds are a type of municipal bond that are distinct in their funding mechanism. The primary defining characteristic of revenue bonds is that they are backed by the revenue generated from specific projects or sources, rather than being supported by general taxation. When governments issue revenue bonds, they typically do so for capital improvements, such as the construction of infrastructure projects like bridges, schools, or utilities. These bonds generate funds through the income produced from the project they finance—such as tolls from a toll road or fees collected from a water utility. Because these bonds are linked directly to the revenue stream of the project, they often carry higher interest rates compared to general obligation bonds, which are backed by the government’s taxing power. The mentioned characteristics are significant because they highlight the relationship between the bond sale, the expected revenue, and the intended use of the funds. While other types of bonds might focus on various public comments or operating budgets, the crux of revenue bonds lies in financing capital improvements with expected project-generated revenue.