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 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 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 a financial instrument for dummies? ›
A financial instrument is a contract leading to a financial asset for one entity and liability for another. It's essential for trading.
What do you mean by instrument? ›
An instrument is usually a tool for making music, like a piano or a guitar, but it can also be used for almost any kind of tool or thing you use to get something done. A thermometer is an instrument for measuring temperature. A violin is an instrument used for making music.
What is a instrument in contract law? ›
An instrument is a written legal document that records legally enforceable acts or agreements and secures their associated legal rights, obligations, and duties.
What is an instrument in banking? ›
Bank Instrument means any guarantee, indemnity, letter of credit (including any Import L/C and any standby letter of credit), tender bond, bid bond, performance bond or advance payment bond or any instrument of a similar nature (whether entailing autonomous, primary liability on the part of the issuer, or accessory, ...
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).
Is financial instrument a contract? ›
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
Is a financial instrument a financial asset? ›
Financial instruments are classified as financial assets or as other financial instruments. Financial assets are financial claims (e.g., currency, deposits, and securities) that have demonstrable value.
What are financial instruments and how do they work? ›
Financial instruments are either cash or derivative instruments. The price of cash instruments is determined by market supply and demand. These include shares, bonds and currencies. The price of derivative instruments is determined by the price of other instruments.
Financial instruments: Meaning
In this case, they can issue shares so that they receive money from investors and thus capital in return. Financial instruments are also used to hedge capital, for example when a company wants to secure a certain exchange rate for foreign currency transactions.
What is the fair value of financial instruments? ›
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is therefore a market-based measurement and not specific to each entity.
What is an instrument with examples? ›
A musical instrument is an object such as a piano, guitar, or flute, which you play in order to produce music.
How do instruments work? ›
How do instruments make sound? Instruments produce a sound when a part of it vibrates, producing sounds that are loud enough to be heard by the human ear. These sounds, or musical notes, are produced differently in each of the four main families of instruments: Woodwind, Brass, String, and Percussion.
What is a simple instrument? ›
There are a number of options, such as the recorder, harmonica, voice, and ukulele, that all stand out as relatively easy choices for beginners and common first instruments. The recorder, with its straightforward finger placement and clear sound production, is often recommended for those new to music.
What is a financial instrument with example? ›
In simple words, any asset which holds capital and can be traded in the market is referred to as a financial instrument. Some examples of financial instruments are cheques, shares, stocks, bonds, futures, and options contracts.
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).
What is an instrument payment? ›
'payment instrument' is a device used for making payment transactions, such as a credit or debit card, an e-banking or telephone banking arrangement.
What is an instrument in money market? ›
Some of the instruments traded in the money market include Treasury bills, certificates of deposit, commercial paper, federal funds, bills of exchange, and short-term mortgage-backed securities and asset-backed securities.
