What Is Obligation?
An obligation is the responsibility of a party to meet the terms of a contract or agreement. If an obligation is not met, the legal system often provides recourse for the injured party.
Key Takeaways
- Obligations are responsibilities, often in the form of a contract, such as a mortgage or auto loan.
- The Financial Obligation Ratio published by the Fed is a good benchmark for household budgeting.
- Failure to meet obligations is often met with punishment, such as imprisonment or fines.
- Debt, liquidity, and solvency ratios are all used to measure a firm's ability to meet its debt obligations.
Understanding Obligation
Obligations are the backbone of our economy. Trusting that a contract will be adhered to helps create a stable, healthy society. Individuals, corporations, governments, banks, and institutions—any entity that operates within a society—must regularly fulfill their obligations, or else face punishment.
Financial obligations represent any outstanding debts or regular payments that a party must make. For example, if you owe or will owe money to anybody, that is one of your financial obligations. Almost any form of payment or financial security represents a financial obligation. Coins, banknotes, shares of stock, and bonds are all promises or obligations that you will be credited with the accepted value of the item or gain certain rights or privileges by holding it.
Many formal financial obligations, like mortgages, student loans, or scheduled service payments are set down in written contracts signed by both parties and establish a creditor-debtor relationship of obligation.
Money can be construed as a financial obligation mandated by the government as legal tender, obliging producers or vendors to sell goods in exchange for currency such as coins and banknotes.
Obligation and Personal Finance
Obligations are an important aspect of personal finance. Every budget should first include all financial obligations for which the individual is responsible over the given time period. The Financial Obligation Ratio (FOR), a quarterly figure released by the Federal Reserve Board that estimates the ratio of household debt payments to disposable income, is a useful benchmark for individual budgets.
Assessing obligations carefully is especially important for retirement planning. When planning over longer periods of time such as retirement or for your child's college fund, the individual budgeter should consider more long-term obligations such as interest rates on mortgage payments or healthcare costs that have yet to be incurred.
14.7
The recommended financial obligation ratio for the last quarter of 2020.
Obligation Vs. Rights
Obligation means something particular in the world of derivatives, and especially in options trading. A call option, for instance, is a financial contract that givesthe option buyer the right, but not the obligation, to buy a stock, bond,commodity,or other asset or instrument at a specified price within a specific time period. This means that the option holder can decide whether or not to invoke that right, and is not obliged to do so.
Options trading can be complicated and investors sometimes mistakenly believe purchasing a call option requires you to buy a certain amount of stock at the strike price, but this is not the case. In fact, one of the most attractive aspects of buying a call option versus simply buying a stock is that it gives the trader exposure to a large amount of stock for a smaller amount of money, called the premium.
A futures or forward contract, on the other hand, assigns both the right and the obligation to deliver or receive the underlying asset or instrument.
Obligations aren’t just financial, such as the case of a politician’s obligation to faithfully represent their constituents.
Obligation Examples
The failure to meet one's obligations is often met with punishment, the degree of which depends on the character of the contract. For example, if an individual fails to make their car payments regularly, the auto company will repossess the car.
Taxes, too, are a form of obligation, and failing to meet them results in large fines or imprisonment. When large companies fail and find themselves unable to fulfill their outstanding debts, they can declare bankruptcy, which initiates the relief of the total debt for the debtor while allowing the creditor to recuperate some of their losses in the form of assets held by the debtor.
Obligations can be held by any individual or entity that is engaged in any sort of contract with another party, and broadly speaking, can be written or unwritten. A politician, for example, has the written obligation to serve all of their constituents within the confines of the law, but they may also have an unwritten obligation to make decisions that will affect their largest donors. The existence of these kinds of agreements is nearly impossible to prove and such obligations cannot be effectively regulated. Justice systems dating back to the Romans have offered stringent legal enforcement of important contracts.
What Are Collateralized Debt Obligations?
A collateralized debt obligation or CDO is a complex structured finance product backed by a pool of loans and other assets that are then sold to institutional investors. CDOs are a type of derivative and played a significant role in the 2007 housing crisis.
What Ratios Measure a Firm's Ability to Meet Its Current Debt Obligations?
The debt ratio, which is defined as the ratio oftotal debt to total assets, is often used to measure how likely a financial institution is to meet its obligations. Liquidity and solvency ratios are also commonly used for the same purpose.
What Obligations Does the Federal Government Have to the States?
The federalgovernmentis obligated to guarantee eachstatea republican form ofgovernment, protect eachstatefrom invasion, and, when expressly asked by thestate'slegislature or executive, to protect thestateagainst "domestic violence."
What Are Reasons for Terminating Contractual Obligations?
Contractual obligations can be legally terminated for any of the following reasons: fraud, a breach of contract, if both parties agree to end the contract due to a mutual mistake, or a legal term known as "impossibility of performance."
FAQs
Financial obligations represent any outstanding debts or regular payments that a party must make. For example, if you owe or will owe money to anybody, that is one of your financial obligations. Almost any form of payment or financial security represents a financial obligation.
What does legal obligation mean and examples? ›
The legal definition of obligation is a binding tie which requires individuals involved to do something or pay for something under legal terms according to the law. For example, Eric has an obligation to pay for his speeding ticket within 60 days under the state law in North Carolina.
What can be defined as a financial or legal obligation? ›
Legal financial obligations, or LFOs, are the fines, fees, costs and restitution imposed by the court on top of a criminal sentence.
What is obligation in financial accounting? ›
An obligation is a commitment to pay a third party based on an underlying contract, such as a purchase order, mortgage, or bond issuance. If the obligation is probable and the amount can be determined, then it is recorded in an entity's accounting records as a liability.
What is simple obligation examples? ›
Example: A person promises to pay $100 to another person on a specific date. This is a simple obligation because it does not depend on any outside event. The person is legally and morally obligated to pay the $100 on the specified date.
What are examples of US obligations? ›
*Investments in U.S. government obligations may include the following: Federal Farm Credit Banks, Federal Home Loan Banks, the Student Loan Marketing Association, the Tennessee Valley Authority, the U.S. Treasury Department (bonds, notes, bills, certificates, and savings bonds), and certain other U.S. government ...
What is an example of obligation in contract law? ›
One example of contractual obligations is the responsibilities of parties to a contract for the sale of a car. One party is obligated to transfer ownership of the automobile, while the other is obligated to pay for it.
What is an example of a real obligation? ›
Examples of real obligations are the periodical payment obligation of a long lease holder, the maintenance of the property subject to a servitude and the financial contributions by apartment owners. A real obligation differs in several aspects from a personal obligation.
What is legal obligation or responsibility? ›
Legal obligation. A measure of mental capacity, used in deciding the extent to which a person can be held accountable for a crime; see diminished responsibility. Specific duties imposed upon persons to care or provide for others, such as the parents' duty to the child or the guardianship of a ward.
What is a financial obligation of a business? ›
What are financial obligations? A financial obligation arises when a company registers with credit reporting agencies a debt that has not been paid by another company in a negotiation. This information is recorded in a database for five years after the maturity of the obligations.
An obligation is a legal bond (vinculum iuris) by which one or more parties (obligants) are bound to act or refrain from acting. An obligation thus imposes on the obligor a duty to perform, and simultaneously creates a corresponding right to demand performance by the obligee to whom performance is to be tendered.
What are the three types of obligation? ›
Discussion: Condition – future and uncertain event upon which the existence or extinguishments of an obligation is made to depend. Pure Obligation – one which does not contain any condition or term upon which its fulfillment is made to depend. Conditional Obligation – kind of obligation which is subject to condition.
What makes an obligation? ›
An obligation is a legal relationship between two or more persons. An obligation exists when: (1) an obligor (debtor) owes a performance in favor of an obligee (creditor); and (2) the performance or duty is legally enforceable.
Is financial obligation a liability? ›
Liability refers to a financial obligation of a company. This means that it has to pay a debt to another company or a private person. A classic example is a bank loan that must be repaid to the bank in monthly instalments.
What is an example of obligation to do or not to do? ›
Another type of obligation that may be imposed on a party to a contract is an obligation not to do something. For example, if one party agrees to sell goods to another party, the seller may agree not to sell those same goods to someone else.
What is a legal obligation to do or not do something? ›
The popular meaning of the term “obligation” is a duty to do or not to do something. In its legal sense, obligation is a civil law concept. An obligation can be created voluntarily, such as one arising from a contract, quasi-contract, or unilateral promise.
Why are obligations important? ›
Without obligations people would feel no need to obey the law or act morally because there would be nothing attaching them to this world. Obligations hold the world together through bonds forged from implicit debts to one another.
What are Government obligations? ›
Government obligation means a public debt obligation of the United States Government and an obligation whose principal and interest is unconditionally guaranteed by the United States Government.
What are human obligations? ›
Also, human moral obligations are moral obligations that humans have towards other humans in their individual capacities as well as members belonging to groups. In other words there is also a collective sense of human moral obligation which enjoins us as members of groups to look after the welfare of the group.
What is an example of obligation arise from law? ›
Obligations arise when imposed by the law itself and cannot be presumed. [1] For example, an obligation arising from law is the payment of taxes. Contracts. Obligations arise from the stipulation of the parties; it has the force of law and should be complied with in good faith.
It is obligatory that
It is obligatory that we buy uniform (Kita wajib membeli seragam sekolah) It is obligatory that you have driving license (Kamu wajib memiliki SIM)
Is an obligation a legal contract? ›
“Obligation” Defined.
—A contract is analyzable into two elements: the agreement, which comes from the parties, and the obligation, which comes from the law and makes the agreement binding on the parties.
Is an obligation legally binding? ›
the act of binding or obliging oneself by a promise, contract, etc. Law. an agreement enforceable by law, originally applied to promises under seal.
How do you deal with financial obligations? ›
On This Page
- Prioritize what you can control on discretionary spending.
- Find ways to earn more money.
- Pay essential bills.
- Save money during trying times.
- Track your money-saving progress.
- Talk to your lenders.
- Consult with an expert financial advisor.
Every obligation has four essential elements: an active subject; a passive subject; the prestation; and the legal tie.
What are the 5 sources of obligations? ›
The following are the sources of obligations:
- Law;
- Contracts;
- Quasi-contracts;
- Acts or omissions punished by law; and.
- Quasi-delicts. (Article 1157, Civil Code.)
10 Kinds of Obligation
- Pure.
- Conditional.
- Alternative.
- Facultative.
- Joint.
- Solidary.
- Divisible.
- Indivisible.
An obligation is conditional where it is made to depend upon a future and uncertain event, either by suspending it until the event occurs or is certain not to occur, or by making its extinction dependent on whether or not the event occurs.
What is natural obligation in law? ›
A "natural obligation" may be defined as an obligation that does not. give rise to an action to enforce it, but that does have some cognizable legal. effects. Natural obligations provide an odd instance where a creditor does have. a right without a remedy, or at least the traditional remedy.
What kind of obligation is debt? ›
In its simplest form, debt is an obligation for you to pay another person at some time in the future. The agreement to pay can be oral or written. An oral agreement is a spoken agreement between two or more people. Other times the agreement will be in writing.
Obligations incurred are business costs or expenses that need to be paid, but wait for a time as accounts payable (in other words, bills to be paid as part of the normal course of business) instead of being paid immediately.
What are financial obligations on a balance sheet? ›
On the other side of the balance sheet are the liabilities. These are the financial obligations a company owes to outside parties. Like assets, they can be both current and long-term.
What is an example of obligation in business? ›
The definition of obligation in business law refers to contract laws that require a party to either do something or keep from doing something. One example is the obligation to repay a mortgage loan when you buy a house.
What is an example of an obligation situation? ›
For example, if a person fails to pay a bill on time, in breach of the terms and conditions of a contract they signed, they may have a penal obligation to pay a penalty fee.
What is an example of obligation and contracts? ›
One example of contractual obligations is the responsibilities of parties to a contract for the sale of a car. One party is obligated to transfer ownership of the automobile, while the other is obligated to pay for it.
What are obligation ethics examples? ›
For example, one may have a moral obligation to help a friend, to support a parent in old age, or to minimally respect another's autonomy as a moral agent. We can succeed in meeting, or fail to fulfil, our moral obligations.
What are examples of obligated? ›
You are legally obligated to repay the loan. = You are obligated by law to repay the loan. I feel obligated to return his call.
What is an example of a strong obligation? ›
Strong Obligation
In brief, the rule is that must is used for internal obligations, and have to is used for external obligations. My tooth is sore. I must go to the dentist. To travel, you have to carry a passport.
What obligations do businesses have? ›
If you neglect these responsibilities, the legal costs could be high, and could include the loss of your permits and business licenses.
- Employee Payments and Taxes. ...
- The IRS and Government. ...
- Employer Reporting to Employees. ...
- Maintaining Safety Standards. ...
- Maintaining Proper Equipment and Tools.
Moral obligation of a company is mandatory on each employee where they are accountable for doing what is right. Sometimes it will be communal responsibilities, which involve all employees in the company. Moreover Company's culture often commands the importance of moral obligation in the organization.
