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In finance, an obligation is a financial responsibility where the terms of a contract must be met. Should an obligation between parties fail then the party who is at default may face legal action.
In this scenario, the guilty party will not only have to agree to pay the set amount to fulfill the contractual arrangement but may also be responsible for covering all legal proceedings cost.
Routine payments or outstanding debt of any kind are considered financial obligations, so if someone owes you or will owe you money that is considered an obligation.
Different Types of Obligations
Bonds, banknotes, and coins are examples of obligations because they assure users that they are accredited with the face value of that item.
Obligations play a considerable role in personal finance and should be included in every budget.
While every budget is different from one another, individuals can use the Financial Obligation Ratio (FOR) that is published quarterly by the Federal Reserve Board as a good reference point on how to best structure individual budgets.
For those in the process of retirement planning, obligations should be scrutinized with a wide scope.
These should include typical financial obligations such as mortgage payments and healthcare expenses that may incur.
In trading, obligations are dealt in the form of put options and short selling or they may refer to the selling of shares on the next trading day after they were purchased in delivery.
When obligations fail to be met and legal proceedings have begun, the severity of the punishment set forth is primarily determined by the terms of the contract although juror and judge intervention may lessen the obligations that must be met to fulfill the contract.