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Definition: Hospital Revenue Bond
Hospital Revenue Bond is used to fund and support the construction and renovation of a nursing home/ hospital or for buying new equipments. These bonds are issued by municipality or state agency and the income from such bonds is tax exempted from state, federal or local authority. Hospital revenue bond are not backed by issuing municipality but are secured by the hospital revenue.
The hospital revenue that are created from Medicare, are used to repay the bondholders. This means that generally the bondholder are paid after all the expenses for running the hospital are paid. These bond are riskier than other municipal bonds, water or sewer bonds because if the hospital is not profitable and day to day expenses are not met, then in such a case of insufficient funds, issuing authority is not oblige to pay back the bondholders. Hospitals deals with high amount of bad debt when patients are not able to pay for the services and they do not have any power to tax these individuals to pay the debts.
This implies that hospital revenue bonds would have a high yields as the risk is greater than the general bonds. Rating companies capture this risk, evaluate the revenue based bond, calculates a probability that the bondholders will be paid their obligation on time and then assigns a rating.