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Finance Dictionary and Glossary of Investment Terms
Bond sold to finance a project whose revenues will be used to pay off the interest and principal on that bond. Such bonds are generally issued by municipalities, who use the proceeds to finance various kinds of development projects. Self-supporting bonds are sometimes named after the specific kind of project that they are financing (for example, hospital revenue bond). Municipalities might opt for a revenue bond structure in cases where they have the power to levy charges on users of the projects, such as roads, airports, or hospitals. Since a self-supporting bond is supported by project-specific revenues as opposed to more secure general tax revenues, they are of slightly lower quality than general obligation bonds, and so they tend to have higher yields. However, self-supporting bonds issued by municipalities have a good track record, and are generally considered low risk, liquid investments provided they are backed up by viable projects. Thus, the most important factor to keep in mind when investing in such bonds is the revenue prospects of the project that is being financed by the bond. Like all municipal bonds, interest earned on the bonds is exempt from federal tax. In the case that the bond is bought by a resident of the state that issued the bond, the interest payments are also exempt from state tax. Interest payments are further exempt from local tax if they are bought by residents of the locality that issued the bond.