Toll Revenue Bond

What Is a Toll Revenue Bond?

The term toll revenue bond alludes to a municipal bond that makes principal and coupon payments from toll revenues. Capital from bondholders is utilized to build projects, and money generated from them — toll road revenue — is utilized to pay them back. These bonds are a subcategory of highway and transportation bonds, which are among the majority of the market's investment grade bonds. Notwithstanding this reality, (toll) revenue municipal bonds aren't close to as well known as broad obligation (GO) bonds.

Understanding a Toll Revenue Bond

A toll revenue bond is a type of municipal security that is typically used to fund the construction of a public project, like a bridge, a passage, or an expressway. It can likewise fund arranged infrastructure renewal projects, for example, rest stops and stops along toll roads. Bondholders are guaranteed their principal along with interest by a certain maturity date. Revenues from tolls paid by users of the public project pay back the bondholders.

Toll revenue bonds are commonly issued by state transportation agencies or freeway commissions. Toll revenue bonds (and revenue municipal bonds, overall) contrast from general obligation bonds, which draw proceeds from numerous tax sources. Since toll revenue bonds depend on a single stream of income, they have more risk and they pay more interest than comparative GO bonds.

Investors ought to know that these bonds are intensely dependent on the associated revenue, as the name infers. They are not backed by the responsible government or its revenue stream (generally taxes). This means assuming the revenue drops (despite how improbable that might be) — that is, assuming that tolls are disposed of or can presently not be collected — issuers can't pay their bondholders.

As verified over, these bonds give funding to new toll roads and to work on existing roads. Another explanation municipalities issue toll revenue bonds is to permit governments to expand liabilities and keep away from self inflicted limits on state or region debt.

Special Considerations

Toll revenue bonds are a subcategory of highway and transportation bonds. This group involves a bigger category of debt securities called municipal revenue bonds, which make up the majority of all outstanding investment-grade bonds.

Maturity dates contrast for toll revenue bonds from traditional bonds. These bonds will more often than not mature following 20 or 30 years, with many including staggered maturity dates. Accordingly, they are generally viewed as serial bonds. With a serial bond, part of the outstanding debt matures at certain dates until the bond is fully matured toward the end date. Bond issuers regularly issue toll revenue bonds in $5,000 units.

Toll Revenue Bonds versus General Obligation (GO) Bonds

Not all bonds are made similarly. As indicated above, revenue bonds, including toll revenue bonds, accompany greater risk since they're not backed by the full faith and credit of the responsible government entity. Assuming the revenue stream evaporates, the issuer can't pay its creditors the principal and additionally interest. These bonds aren't exactly that famous among investors, even however almost 66% of the bonds on the market are revenue bonds.

Like other revenue bonds, toll revenue bonds are not backed by the full faith and credit of the responsible government entity.

General obligation bonds, then again, are among the most common in investor portfolios. Individuals who hold these bonds are guaranteed repayment, as the government has the power to tax its residents to raise revenue.

Money raised from the sale of bonds, however, no matter what the type, can be utilized to give funding to various projects, like infrastructure. Those that are issued by government substances, whether neighborhood, state, or federal, are regularly exempt from income taxes at the federal level.

Benefits and Disadvantages of Toll Revenue Bonds

Bonds furnish investors with a safe and secure form of investment, especially when combined with a wide range of securities, like stocks, exchange-traded funds (ETFs), mutual funds, and cash accounts, among others.

Investors can utilize toll revenue bonds explicitly to differentiate their fixed-income holdings. Numerous municipal-bond mutual funds, for instance, sprinkle in toll revenue bonds that offer great risk versus reward.

Many target toll revenue bonds in states with sound balance sheets and ideal economic trends, as this connects with a transportation authority's ability to make principal payments over the long term.

Analysis of Toll Revenue Bonds

Some taxpayers see toll revenue bonds as an inefficient funding means, notwithstanding. The Pennsylvania Turnpike, the country's most memorable superhighway, which originally ran from Irwin to Carlisle, gives a case study in expressway debt.

The Pennsylvania Turnpike initially wanted to retire all its debt in 1954, when it repaid bonds utilized for construction. Nonetheless, the Turnpike keeps on collecting tolls right up 'til now. In 2020, it cost $53.50 for a passenger motorist for a one-way trip along the Turnpike's whole span, in the event that motorists paid in cash.

The state's interstate system added a couple of extra roads. In any case, one justification behind the proceeded with fees along the primary span, pundits contend, is that the Pennsylvania Turnpike Commission, and the white-collar positions it made, would cease to exist assuming the debt was at any point fully paid. A book called When the Levee Breaks: The Patronage Crisis at the Pennsylvania Turnpike, the General Assembly and the State Supreme Court, written by William Keisling, subtleties the Pennsylvania Turnpike's supposed history of corruption, waste, and nepotism, funded by toll revenue bonds.

Features

• Toll revenue bonds use toll revenues that the bond funded to repay the principal and coupon of the issue.
• Money raised from toll revenue bonds is utilized to fund new and existing public projects like highways.
• They regularly mature in 20 to 30 years and are issued in $5,000 units.
• These bonds are just one type of municipal bond.
• Toll revenue bonds depend on a single income stream, and that means they carry more risk, yet in addition they pay a higher interest rate than comparable general operation bonds.