American Institute of Certified Planners (AICP) Practice Exam

Which type of bonds uses a fixed source of revenue for debt repayment?

1. General Obligation Bonds

2. Revenue Bonds

3. TIF Bonds

4. Lease-purchase agreements

The correct answer is: Revenue Bonds

Revenue bonds are specifically designed to be repaid from a dedicated source of income, which usually comes from the specific revenues generated by the project or service that the bond is funding. This can include income from user fees, tolls, or other revenue streams directly linked to the project, such as an airport's landing fees or a public utility's charges. The critical aspect of revenue bonds is that they are secured by the income produced by the specific project rather than by the general taxing power of the issuer. This means that if the revenue from the project does not meet expectations, the bondholders may not be repaid, highlighting the importance of the revenue source in achieving successful debt repayment. In contrast, general obligation bonds are supported by the issuer’s overall credit and taxing power rather than a specific revenue stream. TIF bonds (Tax Increment Financing) are tied to the expected increase in property tax revenues generated from a development area, and lease-purchase agreements relate to financing secured by leasing arrangements rather than dedicated revenue sources. Thus, revenue bonds stand out due to their reliance on and utilization of a fixed source of revenue for debt repayment, which makes them distinct in municipal finance.