Instrument

Instrument

An instrument is a means by which something of value is transferred, held, or accomplished. In terms of instruments as economic variables, policymakers and central banks commonly adjust economic instruments, such as interest rates, to achieve and maintain desired levels of other economic indicators, such as inflation or unemployment rates. In the field of finance, an instrument is a tradable asset, or a negotiable item, such as a security, commodity, derivative, or index, or any item that underlies a derivative. In separate contexts, an instrument can alternatively refer to an economic variable that can be controlled or altered by government policymakers to effect a change in other economic indicators. From a legal perspective, some examples of legal instruments include insurance contracts, debt covenants, purchase agreements, or mortgages.

An instrument is an implement with which to store or transfer value or financial obligations.

What Is an Instrument?

An instrument is a means by which something of value is transferred, held, or accomplished. In the field of finance, an instrument is a tradable asset, or a negotiable item, such as a security, commodity, derivative, or index, or any item that underlies a derivative.

In separate contexts, an instrument can alternatively refer to an economic variable that can be controlled or altered by government policymakers to effect a change in other economic indicators. It can also refer to a legal document such as a contract, will, or deed.

An instrument is an implement with which to store or transfer value or financial obligations.
A financial instrument is a tradable or negotiable asset, security, or contract.
Legal instruments may contain binding terms, rights, and/or obligations.

Understanding Instruments

International Accounting Standards (IAS) defines financial instruments as "any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity."

Basically, any asset purchased by an investor can be considered a financial instrument. Antique furniture, wheat, and corporate bonds are all equally considered investing instruments in that they can all be bought and sold as things that hold and produce value. Instruments can be debt or equity, representing a share of liability (a future repayment of debt) or ownership. An instrument, in essence, is a type of contract or medium that serves as a vehicle for an exchange of some value between parties.

The values of cash instruments (financial securities that are exchanged for cash like a share of stock) are directly influenced and determined by markets. These can be securities that are easily transferable. The value and characteristics of derivative instruments are derived from their components, such as an underlying asset, interest rate, or index.

Financial instruments may also be divided according to an asset class, which depends on whether they are debt-based or equity-based.

Economic Instruments

In terms of instruments as economic variables, policymakers and central banks commonly adjust economic instruments, such as interest rates, to achieve and maintain desired levels of other economic indicators, such as inflation or unemployment rates. Economic instruments may also include such assets as performance bonds or pollution taxes, all designed to bring about some change that is sought as a part of a policy.

For instance, an economic instrument like a tax might be instituted to help reflect some form of cost, which might not be monetary, that is incurred in the procurement or production of some goods or services. Accessing and using natural resources can have broader effects on the environment and lead to the depletion of that resource. Fees on the production of such resources might be instituted to reflect the impact of exploiting these resources.

Legal Instruments

From a legal perspective, some examples of legal instruments include insurance contracts, debt covenants, purchase agreements, or mortgages. These documents lay out the parties involved, triggering events, and terms of the contract, communicating the intended purpose and scope.

With legal instruments, there will be a statement of any contractual relationship that is established between the parties involved, such as the terms of a mortgage. These may include rights given to certain parties that are secured by law. A legal instrument presents in a formal fashion that there is an obligation, act, or other duty that is enforceable.

Related terms:

Affirmative Covenant

An affirmative covenant is a type of promise or contract that requires a party to adhere to certain terms. read more

Corporate Bond

A corporate bond is an investment in the debt of a business, and is a common way for firms to raise debt capital. read more

Derivative

A derivative is a securitized contract whose value is dependent upon one or more underlying assets. Its price is determined by fluctuations in that asset. read more

Economic Indicator

An economic indicator refers to data, usually at the macroeconomic scale, that is used to gauge the health or growth trends of a nation's economy, or of a specific industry sector. read more

Financial Instrument

A financial instrument is a real or virtual document representing a legal agreement involving any kind of monetary value. read more

Liability

A liability is something a person or company owes, usually a sum of money. read more

Negotiable

Negotiable refers to the price of a good or security that is not firmly established or whose ownership is easily transferable from one party to another. read more

Obligation

An obligation in finance is the responsibility of a party to meet the terms of a contract or agreement. read more