Assume Generico intends to issue a financial instrument in September of this year. The financial instrument will make variable rate contract payments to holders based upon the LIBOR index. The variable rate will be multiplied times the amount of the principal on 31st day of the 8th month of each year. The instrument has a fixed maturity date of 10 years from the date of issuance. The instruments will be issued for $10,000 each but the principal amount of the financial instrument will be calculated as $10,000 plus or minus the return on the S&P 500 from the date of issuance. Therefore, it is possible that the final principal amount due the investor may be less than the $10,000 invested to purchase the financial instrument.

In summary, the financial instrument has

1) A fixed maturity date of 10 years;

2) A variable rate contract payment made on 8/31 of each year for all 10 years;

3) A contingent amount of principal.

Book/Class: Essentials of Taxation: Individuals and Business Entities

Question: Would the Internal Revenue Service classify the Generico financial instrument as debt or equity? why?