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A performance bond guarantees that a contractor will fulfill the terms of a contract as specified. When a contractor obtains a performance bond, it provides a financial assurance to the project owner that the work will be completed according to the project specifications and within the agreed time frame. If the contractor fails to meet these obligations, the bond issuer (usually a surety company) is responsible for compensating the project owner for any losses incurred due to the contractor's default, up to the bond amount.

This bond serves as a security mechanism that encourages contractors to perform well, as their reputation and ability to secure future contracts can be influenced by their performance. It provides peace of mind for project stakeholders, ensuring that financial obligations are met and that the project will be completed satisfactorily.

The other options do not accurately reflect the role of a performance bond. While a contractor's financial stability may be assessed through other means, it is not the purpose of a performance bond. Likewise, a performance bond does not provide allowances for extra time or protect against material price fluctuations, which are separate concerns in project management.