DEFINITION of 'Instrument'

1) A tradeable asset or negotiable item such as a security, commodity, derivative or index, or any item that underlies a derivative. An instrument is a means by which something of value is transferred, held or accomplished.

2) An economic variable that can be controlled or altered by government policymakers in to cause a desired effect in other economic indicators.

3) A legal document such as a contract, will or deed.

BREAKING DOWN 'Instrument'

1) 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; 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.

2) Commonly, policymakers and central banks adjust economic instruments such as interest rates to achieve and maintain desired levels of other economic indicators such as inflation or unemployment rates.

3) 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.

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