What is the definition of a surety bond?

A surety bond primarily serves as a guarantee for performance obligations, meaning it assures that certain duties, usually of a contractual nature, will be fulfilled by one party. If the party fails to meet their obligations, the surety bond provides a financial guarantee to the other party that they will be compensated for any losses incurred. This is essential in business and contracting contexts where performance is critical.

In contrast, while a surety bond can have aspects of credit—since it guarantees payment or performance in a way that might require creditworthiness—its main function is not as a form of credit. The other options, such as a type of insurance policy or a document for property transactions, do not capture the essence of what a surety bond represents; it lies distinctly in the realm of guaranteeing performance and financial assurance for obligations.