obligation

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noun ob·li·ga·tion \ˌä-blə-ˈgā-shən\
Updated on: 26 Jul 2017

Definition of obligation

  1. 1 :  the action of obligating oneself to a course of action (as by a promise or vow)

  2. 2a :  something (such as a formal contract, a promise, or the demands of conscience or custom) that obligates one to a course of action made an obligation to pay their children's college expensesb :  a debt security (such as a mortgage or corporate bond)c :  a commitment (as by a government) to pay a particular sum of money; also :  an amount owed under such an obligation Unable to meet its obligations, the company went into bankruptcy.

  3. 3a :  a condition or feeling of being obligated felt an obligation to voteb :  a debt of gratitude returned the favor as an obligation

  4. 4 :  something one is bound to do :  duty, responsibility countries in which military service is an obligation fulfilled their familial obligations

Examples of obligation in a Sentence

  1. She believes that all people have a moral obligation to defend human rights.

  2. He argues that people in a community have certain obligations to each other.

  3. She failed to fulfill her obligations as a parent.

Recent Examples of obligation from the Web

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'obligation.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

First Known Use of obligation

14th century


Financial Definition of OBLIGATION

obligation

What It Is

A collateralized debt obligation (CDO) is a security that repackages individual fixed-income assets into a product that can be chopped into pieces and then sold on the secondary market. They are called collateralized because the assets being packaged -- mortgages, corporate debt, auto loans or credit card debt- - serve as collateral for investors.

How It Works

CDOs are described as structured asset-backed securities because they pay cash flows to investors in a prescribed sequence, based on how much cash flow is collected from the package of assets owned.

The CDO is split into different risk classes known as tranches. Interest and principal payments are made in order of seniority so that senior tranches have the least risk. Junior tranches, which have higher default risk, usually have higher coupon payments.

A typical CDO may consist of a portfolio of 100 corporate bonds and have an average S&P rating of B+. Assuming a total portfolio size of $300 million, the CDO might have six classes or tranches:

collateralized debt obligation

The Class A senior tranche will offer investors the lowest yield since it has the highest S&P rating. The equity tranche would have the highest yield since it is the most risky component of the deal structure.

Why It Matters

Collateralized debt obligations allow banks and corporations to sell off debt and free up capital to re-invest or loan. The downside of CDOs is that the loan originators have little incentive to collect when loans in the package come due since these loans are now owned by other investors. This may make originators less disciplined in adhering to strict lending standards.

Another downside of CDOs is the complexity of these products. Buyers may not know exactly what they are buying or whether the package is really worth the price. The opaqueness and complexity of CDOs can result in a market panic if investors lose confidence and CDOs become more difficult to re-sell. This was the scenario during the Sub-Prime Crisis of 2007 when many banks were forced to take sizable write-downs on their CDO holdings.



OBLIGATION Defined for English Language Learners

obligation

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noun

Definition of obligation for English Language Learners

  • : something that you must do because of a law, rule, promise, etc.

  • : something that you must do because it is morally right


OBLIGATION Defined for Kids

obligation

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noun ob·li·ga·tion \ˌä-blə-ˈgā-shən\

Definition of obligation for Students

  1. 1 :  something a person must do because of the demands of a promise or contract Make sure you know your rights and obligations before you sign.

  2. 2 :  something a person feels he or she must do :  duty I can't go because of other obligations.

  3. 3 :  a feeling of being indebted for an act of kindness Don't feel any obligation to return the favor.


Law Dictionary

obligation

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noun ob·li·ga·tion \ˌä-blə-ˈgā-shən\

Legal Definition of obligation

  1. 1 :  a promise, acknowledgment, or agreement (as a contract) that binds one to a specific performance (as payment); also :  the binding power of such an agreement or indication held that the amendment did not unconstitutionally impair the obligations of contracts — Davis v. American Family Mut. Ins. Co., 521 N.W.2d 366 (1994)

  2. 2 :  a debt security (as a corporate or government bond) collateralized debt obligation :  a security backed by a pool of diversified securities that usually do not include mortgages collateralized loan obligation :  a security backed by a pool of commercial loans collateralized mortgage obligation :  a bond collateralized by a pool of mortgage obligations or pass-through securities and paid according to the maturity and amortization schedule of its class and not directly from the underlying obligations —called also CMO

  3. 3 :  what one is obligated to do, satisfy, or fulfill: as a :  a commitment to pay a particular amount of money does not create a debt, liability, or other obligation, legal or moral — State v. Florida Dev. Fin. Corp., 650 So. 2d 14 (1995); also :  an amount owed in such a commitment b :  a duty arising from law, contract, or morality had a legal obligation as an employer a contractual obligation

  4. 4 in the civil law of Louisiana :  a relationship that binds one party to a performance (as a payment or transfer) or nonperformance for another party — see also contract, offense, quasi-offense Editor's note: An obligation under civil law may arise by operation of law, naturally, or by contract or other declaration of will. The elements of an obligation are: the parties, an object, the relationship by virtue of which one party is bound to perform for the other's benefit, and, in the case of conventional obligations, a cause. conditional obligation :  an obligation that is dependent on an uncertain event conventional obligation :  an obligation taking the form of a contract heritable obligation :  an obligation that may be enforced by the successor of the obligee or against the successor of the obligor joint obligation 1 :  an obligation binding different obligors to a performance for one obligee 2 :  an obligation binding one obligor to a performance for different obligees Editor's note: In civil law, one of two or more obligors in a joint obligation is only liable for his or her portion of the performance. natural obligation :  an obligation arising from moral duty that is implied but not enforceable by the law several obligation 1 :  any of the obligations binding different obligors to separate performances for one obligee 2 :  any of the obligations binding an obligor to separate performances for different obligees solidary obligation :  an obligation under which any of two or more obligors can be held liable for the entire performance (as payment of a debt) Editor's note: Solidary obligation is similar to joint and several liability in common law.



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