Conceptual Design of Bonds Denominated in ETF Shares

Summary

The document explores whether a bond could specify repayment in units of another security, such as stock or ETF shares, rather than in conventional currency. It frames the question both as a conceptual possibility and a legal one, then proposes an ETF whose bond holdings are obligations denominated in the ETF's own shares. In this design, the fund would issue shares to acquire bonds, and borrowers could later sell or exchange those shares.

The proposal compares the ETF to a private-sector monetary issuer: its shares function as the unit of account and medium of exchange, while its managers choose which issuers receive financing. The text presents this as a thought experiment, not an established structure or legal analysis. It supplies no examples, valuation framework, redemption mechanics, collateral treatment, or discussion of how share creation and repayment obligations would be governed, so practical feasibility remains unresolved.

Key ideas

• A debt contract could conceptually define its obligation in units of a security rather than fiat currency.
• The proposed fund would create its shares and use them to purchase bonds denominated in those same shares.
• Borrowers receiving the shares could sell them for currency or potentially exchange them for goods.
• The design casts fund managers as credit allocators and the ETF shares as a privately issued monetary unit.
• The document raises legal and practical questions but does not answer them or establish working examples.

Tags

# Can a bond be denominated in another security?


# Can a bond be denominated in another security?












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).

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.