The deal was first reported by ESPN.com's Michael Smith.
Denver also got a sixth-round pick and Detroit got a fifth-round pick.
Bly has 33 career interceptions, the fourth-most in the league since 1999. He has returned five interceptions for touchdowns in his career.
The signing should end any speculation Bly wouldn't report to the Broncos.
Broncos head coach Mike Shanahan told the Denver Post that Bly initially wasn't happy when traded to Denver, but he believes Bly will be happy with the Broncos.
Neither Bly nor his agent, Kennard McGuire, was available for comment.
ESPN.com senior NFL writer Michael Smith and The Associated Press contributed to this report.