performance bond

A surety bond that one party to a transaction provides to a second party to protect the second party in the event the terms of the contract are not met. In the event that the terms are not met, the company providing the insurance (the first party) is required to reimburse the second party. A similar concept occurs in the futures or options market. In that case, both the buyer and seller of contracts deposit money to ensure that each will meet the terms of the contract. This deposit is called a performance bond margin, which is a security deposit, not a down payment.