0
$\begingroup$

Could a bond be issued that's denominated in securities like ETF shares or stock shares? Of course most people would not want to buy it, but is it possible? I know it's possible to short a security, which requires a loan be denominated in the security, so I don't see why a bond couldn't also be. Specifically I'm asking if it makes any sense conceptually, and if it would be legal. And if you know any examples of such a bond please share.

I ask because an interesting application might be an ETF composed of bonds (preferably with collateral) denominated in that same ETF's shares. When the ETF goes to purchase the bonds, it simply creates the shares first then buys the bonds with the shares it just created. The bond issuers could then sell their newly acquired ETF shares for some currency, or, if possible, trade them for the end products they desire. In this way, the ETF would kind of be like a central bank, but one that does business with the private sector. The shares are the currency, the bonds are the loans (with the bond issuer being the borrower), and the ETF managers are the bankers deciding how much of whose bonds to buy with their ability to create money (shares).

$\endgroup$
  • $\begingroup$ I don’t quite understand the ETF application, but look up Convertible Bonds and especially Mandatory Convertible bonds. The payoff of these is linked to a share price. $\endgroup$ – dm63 Sep 12 '19 at 0:17
  • $\begingroup$ Thanks, a mandatory convertible bond is close to what I'm looking for, but looks like it only gives limited exposure to the "denominating" security. Investopedia says that usually a convertible bond is issued by a company and is convertible to its own stock, and after all, no company should want to issue bonds denominated purely in its own stock because then it would effectively be shorting itself. $\endgroup$ – Jonah Sep 12 '19 at 1:09
  • $\begingroup$ Although a mandatory convertible bond with a fixed conversion ratio would work $\endgroup$ – Jonah Sep 13 '19 at 3:18
  • $\begingroup$ The analogy to a central bank might make more sense if you consider the fact that the Federal Reserve's assets are mostly USD-denominated Treasury bonds $\endgroup$ – Jonah Sep 13 '19 at 3:23

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.