What is an 'Instrument'

An instrument is 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.

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

BREAKING DOWN 'Instrument'

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. An instrument, in essence, is a type of contract or medium that serves as a vehicle for an exchange of some value between parties.

Different Types of 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 policy. For instance, an economic instrument such as 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 production of such resources might be instituted to reflect the impact of exploiting these resources.

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. This may include the grant of rights to certain parties that is secured under law. A legal instrument presents in a formal fashion that there is an obligation, act, or other duty that is enforceable.

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