As its name suggests, a performance bond is used in a contract (I am more familiar with construction contracts) to ensure performance of the contractor and also protect against bankruptcy of the contractor. It is held by an independent surety (a 'bondsman'), usually an insurance company. As far as I know it differs from insurance policies in that the risk is not re-insured (spread to other insurance cos) by the insurance company.
The bond can be called in upon either default on performance of the contract, i.e. late regarding schedule, abandonment of the site or bankruptcy of the contractor, providing a lump sum to pay another contractor to take over the conpletion of the contract. Typical boinds on construction jobs are 2% of the ciontract sum, depending on the size / risk involved.