A financial obligation is a negotiable debt security that companies and governments put into circulation as a tool to finance themselves by attracting new investors. They usually differ from the bond by focusing on long-term periods, although it is often called directly (long-term) bond.
Possession of an obligation guarantees the future collection of an amount associated with the repayment in a specified period of time, together with previously agreed interests that will depend on the period in question. In other words, it is a financing tool quite similar to the bond.
Obligations are said to be negotiable securities because they are framed within a regulated and competitive market. This assumes that there is a circulation (that is, buying and selling) of this type of financial products.
As has been indicated, although the obligation is usually associated more with the private sector, there is also the public modality through bonds issued by countries as a model of public financing.
In both cases we would speak of a particularly useful financing instrument when it comes to obtaining more financing and developing economic activity.
Characteristics of an obligation
There are a series of features that define this type of financial product:
- They are considered a more agile and economical financing model than the traditional loan from credit institutions.
- In the case of companies and unlike shares, they do not suppose delivery of an aliquot part of the company or part of its control.
- They have, like other types of title, with elements such as value date, amount, associated interest rate and expiration date. All of them expressed in a document or title that is validated and officially regulated.
- The most common obligation option is long-term, fixed-income security.
Obligation in terms of profitability
They are often associated with high levels of earnings and high interest rates, making these types of products very attractive. It is necessary to indicate that whenever there is a greater profit margin, there is a greater associated risk.
From the investor’s point of view, these securities carry higher returns than others given the higher interest rates at which they are paired.
The possession by an investor of an obligation of a company or debt of a particular country guarantees that it has the commitment to make the return of the amount in question in a specified period of time, just at the interest generated (known as coupons) .
These corporate debt securities also have a deadline for full repayment, known as the expiration date.
Difference between obligation and bond
By definition, they are usually identified as synonymous concepts. This happens since in the Anglo-Saxon world the term bond is generalized.
In economic practice, it is considered that bonds include financial products with a maturity of less than five years, while obligations are directed to longer periods of time.