In a leasing agreement, what is the primary risk that a performance bond mitigates?

In a leasing agreement, the primary risk that a performance bond mitigates is lessee default. A performance bond provides financial assurance that the lessee will fulfill their contractual obligations, typically including the timely payment of lease payments and the proper maintenance or return of the leased equipment. If the lessee defaults on these obligations, the bond can be called upon to cover financial losses incurred by the lessor.

This is particularly useful as it helps ensure that the lessor has a backup source of funds to mitigate potential losses from non-performance by the lessee. Other risks associated with leasing, such as market fluctuations, equipment damage, or tax liabilities, are generally managed through different mechanisms or insurance, rather than a performance bond. Thus, the role of the performance bond is primarily focused on providing security against the risk of the lessee failing to meet their terms of the lease.