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.
Key Takeaways
- 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. Thesemay 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.
FAQs
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.
What does instrument mean in finance? ›
A financial instrument refers to any type of asset that can be traded by investors, whether it's a tangible entity like property or a debt contract. Financial instruments can also involve packages of capital used in investment, rather than a single asset.
What is a financial instrument in law? ›
A financial instrument is an instrument that has monetary value or records a monetary transaction or any contract that imposes on one party a financial liability and represents to the other a financial asset or equity instrument. Stock, bonds, and options contracts are some examples of financial instruments.
What is considered an instrument? ›
In principle, any object that produces sound can be considered a musical instrument—it is through purpose that the object becomes a musical instrument. A person who plays a musical instrument is known as an instrumentalist. The history of musical instruments dates to the beginnings of human culture.
What are some examples of financial instruments? ›
Common examples of financial instruments include stocks, exchange-traded funds (ETFs), mutual funds, real estate investment trusts (REITs), bonds, derivatives contracts (such as options, futures, and swaps), checks, certificates of deposit (CDs), bank deposits, and loans.
What is an instrument in legal terms? ›
An instrument is a written legal document that records the formal execution of legally enforceable acts or agreements, and secures their associated legal rights, obligations, and duties. Contracts, wills, promissory notes, deeds, and statutes passed by competent legislatures are examples of legal instruments.
What does instrument mean in economy? ›
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.
What is an instrument in banking law? ›
Banking instruments include cheques, demand drafts, letters of credit, and debit/credit cards. Cheques are orders to a bank to pay a specified amount to a payee and come in various types like bearer, order, crossed, and post-dated cheques.
What is a basic financial instrument? ›
The most common basic financial instruments are cash, trade debtors, trade creditors and most bank loans. For a debt instrument (receivable or payable) to be basic, returns to the holder must be: •a fixed amount; •a positive fixed rate or a positive variable rate; or.
Which is not an example of a financial instrument? ›
The following are examples of items that are not financial instruments: intangible assets, inventories, right-of-use assets, prepaid expenses, deferred revenue, warranty obligations (IAS 32. AG10-AG11), and gold (IFRS 9. B. 1).
1. : a device used to produce music. 2. : a means of getting something done. curiosity is an instrument of discovery.
What is an instrument example? ›
A musical instrument is an object such as a piano, guitar, or flute, which you play in order to produce music.
Is an instrument an asset? ›
Financial instruments are one type of asset
However, there are other kinds of assets besides instruments. An asset can be anything of value which has a price. All of these are assets: Dollar bills, yen notes, rupee coins.
What is the financial term instrument? ›
Financial instruments are contracts for monetary assets that can be purchased, traded, created, modified, or settled for. In terms of contracts, there is a contractual obligation between involved parties during a financial instrument transaction.
What is an instrument of business finance? ›
Instruments of business financing also called Financial instrument is a physical or electronic document that has intrinsic monetary value or transfer value. For example,cash is a Financial instrument.
What is classified as a financial instrument? ›
A financial instrument is simply a contract between entities that represents the exchange of money for a certain asset. Financial instruments include most types of investments: cash, stocks, bonds, mutual funds, exchange-traded funds (ETFs), certificates of deposit (CDs), loans, derivatives, and more.
What is an instrument in banking? ›
Banking instruments are those devices or instruments which help do banking activities. Here banking activity means transaction of cash, sending and receiving money nationally or internationally, by online or electronic process, the process of lending money and any other activity that includes that bank.
What is the meaning of instrument payment? ›
The term “payment instrument” means a check, draft, warrant, money order, traveler's check, electronic instrument, or other instrument, payment of funds, or monetary value (other than currency).
