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What is a Revenue Anticipation Note?

Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

In this lesson, we will discuss revenue anticipation notes which are bonds issued by government entities where the security of the bond payments (interest and principal) is secured by anticipated future revenue.

Sandwich Shop

Imagine you are working at a sandwich shop. You make $10 per hour, and work 40 hours per week. You are usually pretty good at saving money but you recently started dating a girl and you've spent most of your paycheck on dinner and gifts for her. You are now starting to regret that decision just a little because you need to buy a birthday gift for your brother. His birthday is in two days, and he hinted that he would like a new smartphone. You also hinted that you would get it for him. But you do not know where you will find the money. So, you turn to your best friend. You tell him that if he lends you $200 you will pay him back with your future earnings from the sandwich shop. He works at the same shop and knows you are a hard worker, so he agrees.

That simple example describes, in essence, what a revenue anticipation note is. An IOU (bond) is issued with the understanding that the bond will be paid back from future revenue. In this lesson, we'll go into further detail about revenue anticipation notes, which are also known as RANs. We'll give the formal definition, along with a more detailed example.

Definition

A revenue anticipation note (RAN) is a municipal bond whose payments (interest and principal payments) are secured by the future revenue of a project. In our example, your IOU was secured by your future sandwich shop revenue. RANs are similar but the issuer is a government entity. The bond is issued to finance a project (in our example it was used to finance a birthday gift), and the future revenue comes from that project.

Real-Life Examples

Revenue anticipation notes come in all different shapes and sizes. We'll discuss a few of the most common:

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