I'm not 100% sure on this, Sib, but my way of thinking is that as long as the bard in question is able to come up with a "makeshift" instrument of some sort (i.e. drum on a table top, empty log, one's own chest) then that bard's "bardic music" ability should still be able to be used, even in the absence of a "true instrument"... Bard's are supposed to be "talented entertainers," imaginitive and all that, yes?
As far as spells go, I'd say that it really depends upon the spell being cast. If a particular spell doesn't call for a somatic component then, no, the caster shouldn't need so much as a free finger to cast it. However, if a particular spell does call for a somatic component a free hand (or maybe two) will be required... unless, of course, there's been something along the lines of "still spell" attached to it...
Edit: 
Lookit me! I play one magic user in my life an' all the sudden I'm a friggin expert.

Anyhoo, like I said, I may not be 100% correct about bards and spells, but that's kind of the idea I get. Take it with a grain of salt or a teaspoon of sugar...