American Institute of Certified Planners (AICP) Practice Exam

What type of bonds are repaid from earmarked taxes or user charges?

1. Revenue Bonds

2. Special Tax Bonds

3. Performance Bonds

4. Private Activity Bonds

The correct answer is: Revenue Bonds

The correct choice identifies revenue bonds as those specifically repaid using earmarked taxes or user charges generated from specific projects or services. Revenue bonds are issued to finance projects that will produce income, such as infrastructure development (e.g., highways, bridges, water treatment plants). The income generated from these projects—through user fees or specific tax revenue—is then used to pay back the bondholders. This characteristic differentiates revenue bonds from general obligation bonds, which rely on the broader taxing power of the issuer without being tied to specific revenue streams. Furthermore, while special tax bonds are also backed by specific taxes, they typically relate to a specific tax designated for a particular purpose rather than a project generating direct user fees. Performance bonds and private activity bonds serve different purposes as well; performance bonds ensure contract performance (often in construction) and private activity bonds are issued for specific projects that benefit private entities but are not necessarily backed by user fees or earmarked taxes.