What does "performance bond" refer to in leasing?

A performance bond in leasing serves as a guarantee that the obligations specified in a lease contract will be fulfilled by the lessee. This financial instrument assures the lessor that if the lessee fails to comply with the terms of the lease, the bond can be invoked to cover any potential losses or to ensure that the required obligations are met. The concept is critical in leasing transactions where assurance of performance is vital, as it minimizes the risk for the lessor.

In the context of leasing, a performance bond provides peace of mind by acting as a safety net, ensuring that the lessee has a financial commitment to the terms of the agreement, which may include payment, upkeep of the leased asset, or adhering to usage stipulations.

This definition is distinct from the other options, which do not accurately capture the role of a performance bond in leasing. Providing collateral reflects a different financial arrangement that secures the lease rather than guarantees specific performance. Interest rates pertain to the cost of financing and do not relate to performance guarantees. Similarly, methods for calculating depreciation are focused on asset valuation rather than the assurance of contract performance.