Future Business Leaders of America (FBLA) Securities and Investments Practice Test

Which type of municipal bond is supported by revenues from a specific project?

1. General obligation bonds

2. Bearer bonds

3. Revenue bonds

4. Industrial Revenue Bonds

The correct answer is: Revenue bonds

The correct choice highlights revenue bonds, which are a specific type of municipal bond distinguished by their funding mechanism. Revenue bonds are secured by the revenue generated from a particular project or source, such as tolls from a toll road, fees from a water utility, or earnings from a public facility. This means that they are not backed by the general taxing power of the issuer, but rather rely on the project's ability to generate income to meet financial obligations, including interest and principal repayments. This structure makes revenue bonds attractive for financing projects that can create a steady cash flow, as investors can be confident that the revenue from the project will service the bond’s obligations. Understanding this distinction is crucial for assessing the viability and risk associated with different types of municipal bonds. General obligation bonds, for example, are funded through the general tax revenues of the issuing municipality and are considered less risky because they are backed by the issuer’s credit and taxing power. Bearer bonds are a type of bond that is owned by the holder, making them less common in municipal finance due to tax implications and lack of registration. Industrial revenue bonds are a specialized subset of revenue bonds issued to finance private enterprises, but they are still categorized under the broader category of revenue bonds because they too rely on