What is a key feature of revenue bonds in terms of risk?

The key feature of revenue bonds that aligns with the correct answer is that they are backed by the income generated from specific revenue sources. This means that revenue bonds are issued for projects that will produce a dedicated stream of income to service the debt. Examples of such projects could include toll roads, bridges, or public utilities, where the revenue generated directly contributes to repaying bondholders.

This characteristic is crucial because it defines the risk profile of these bonds. The ability to service debt is not reliant on general taxation or overall governmental creditworthiness but rather on the success and profitability of the specific project or service the bonds are created to fund. As long as the revenue-generating project performs well, the risks to bondholders are mitigated, making these bonds an attractive investment for those who understand the underlying sources of revenue.

In contrast, higher interest rates, no default risk, and federal backing may apply to certain contexts but do not universally characterize revenue bonds. For instance, while revenue bonds may have higher rates than general obligation bonds due to their heightened risk associated with project success, it does not guarantee no default risk. Additionally, revenue bonds typically lack federal backing, making the reliance on specific revenue sources even more critical for their risk assessment.