What are payment bonds?

### Payment bonds are a guarantee that a contractor will pay subcontractors and suppliers.

## Step1: Understanding the Concept of Bonds### A bond is a financial instrument that represents a loan made by an investor to a borrower (usually corporate or governmental). Bonds are used by companies, municipalities, states, and governments around the world to raise capital.## Step2: Identifying the Role of Payment Bonds### Payment bonds are a specific type of bond that guarantees that a contractor will pay subcontractors and suppliers. They are often used in construction projects to ensure that subcontractors are paid for their work.## Step3: Explaining the Functioning of Payment Bonds### When a contractor is awarded a project, they often need to secure a bond to guarantee that they will be able to pay for the materials and labor required to complete the project. If the contractor fails to make payments, the bond will cover the costs, ensuring that subcontractors and suppliers are paid.