What does "investor risk" refer to in municipal finance?

Investor risk in municipal finance primarily refers to the potential loss that investors may accept when purchasing revenue bonds. Revenue bonds are a type of municipal bond that is repaid from the revenues generated by a specific project, such as toll roads, bridges, or utility services. The risk associated with these bonds arises because the repayment is not backed by the general taxing power of the issuing municipality, but rather by the project's revenues. If the project does not generate enough revenue, the bondholders may not receive their expected returns.

Understanding this context is crucial, as investors in revenue bonds must weigh the potential for higher returns against the increased risk of not receiving repayment if the underlying project does not perform as expected. This type of risk is particularly important in municipal finance, where revenue streams can be more unpredictable than general obligation bonds, which are backed by the issuer's full faith and credit.