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An investment instrument is any type of financial arrangement that provides the holder or recipient with the promise of earning some sort of return from that investment. A wide range of financing instruments of this type are available, ranging from a simple savings account all the way through to investment opportunities that provide the investor with returns in the form of interest. Many examples of the investment instrument carry a low rate of volatility, making it possible for even conservative investors to earn some sort of return.
One of the most common examples of an investment instrument is the savings account issued by a bank or similar financial institution. Accounts of this type provide a fixed or floating rate of interest on the balance held within the account, allowing the investor to earn a small return on that balance annually. While the return on this type of investment instrument is minimal, is it considered one of the safest ways to earn interest income, since accounts of this type are often guaranteed by a central bank or some other type of governmental agency.
Another example of an investment instrument that is considered to carry a low rate of risk is the certificate of deposit (CD). This type of account requires that the depositor commit to allowing the money to remain in the account for a specified period of time before any withdrawals can take place. In exchange, the rate of interest applied to the balance of the account is greater than that of a standard savings account. Terms for a CD may range anywhere from 18 months to several years, depending on the banking laws and regulations relevant to the nation in which the bank operates.
The promissory note is also considered an investment instrument. Here, the agreement is arranged for the borrower to repay the principal amount plus an agreed upon rate of interest by a specified date. The exact calculation of the interest that applies will depend on the formula identified in the provisions for the note, possibly setting the amount due as a fixed percentage of the principal, with no provisions for applying interest over multiple time periods.
A bond issue also qualifies as an investment instrument. With this arrangement, the investor purchases the issue with the understanding that interest will be applied throughout the life of the bond, and will either be paid incrementally at specified times between the date of purchase and the maturity rate of the bond, or paid as a lump sum along with the principal at the time the bond matures. Considered a very safe investment, the bond represents one of the more stable ways to use an investment instrument to earn a small return.
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