What is Obligation?
An obligation is a legal requirement to fulfill a responsibility. In the finance world, this often involves making specific payments by specific dates and/or ensuring that a company meets certain performance requirements.
How Does Obligation Work?
A borrower, for example, has an obligation to make payments of an agreed-upon size on an agreed-upon date. A company may have an obligation to provide certain disclosure to the Securities and Exchange Commission (SEC). A board may have an obligation to pay an executive a certain amount of money if certain events occur, and a lender may have an obligation to charge a certain amount of loan interest for a fixed period of time, even if it can get a higher interest rate later on other loans.
Why Does Obligation Matter?
In the finance world, obligations are everywhere, and the fulfillment or lack of fulfillment (or even speculation about the lack of fulfillment) of those obligations has a significant impact on the value of the entities that must meet or depend on the obligations. When a party does not fulfill an obligation, the other party to the contract generally has the right to seek recourse in court.