Lutebards is the lute. The music is generated by pulling the strings right, causing the wooden body of the instrument to generate the right vibrations. The sound from this instrument is gentle and perfect for a song before going to sleep.
Iolo is carrying a lute in Ultima VI and Ultima VII Part Two. In the latter game, a song on a lute by Iolo also gained the party an invitation to Lady Yelinda, the song was a coincidence, since a teleport storm had despoited a lute at the party's feet in Fawn. Iolo's personal lute was a close personal item and thus used by the Hound of Doskar to track Iolo.
In Ultima V, the Avatar had to play Lord British's harpsichord in order to get the Sandalwood Box. The same thing had to be done in Ultima IX to receive an Ankh. Lord British's harpsichord had remained in his room in Ultima V and Ultima VI, but later got donated to to the Royal Museum. Strangely, it returned to its owner in Ultima IX.
For more fun with this instrument, see Harpsichord Tile Shifting.
PanpipesPanpipes are a small instrument held against the lips and blown into. The various individual pipes are arranged according to their chromatic pitch, from which melodies can be produced by skillful breathing.
In Ultima VI, the Avatar had to play "Stones" to Selganor on a set of panpipes in order to receive the Rune of Sacrifice. In this case, the instrument was required to be custom-made from a freshly cut yew log purchased from Ben, which was subsequently sawed by Aaron and finally crafted into the pipes themselves by Julia.
(The sound is the same as the harp)
Not an instrument, but the music box nonetheless creates music. These little boxes have a mechanism that plays a pre-defined music. Only one is found, in Skara Brae. The sound of the music box is very faint and resembles a symphony of small bells.