Final answer:
True, performance bonds, warranties, and guarantees are financial instruments used to share risk by providing assurance against potential losses or failures.
Step-by-step explanation:
Performance bonds, warranties, and guarantees are indeed financial instruments used to share risk. These are mechanisms that assure the involved parties in a transaction. A performance bond is often required in large projects to protect against losses if a contractor fails to deliver as per the agreement. Similarly, warranties and guarantees are promises from a seller to a buyer that goods or services offered will perform as stated for some period; these protect buyers from defects or failures in the product or service.
When considering investment in corporate bonds, they do come with risks despite the predetermined payments based on a fixed rate of interest. The primary risk is default, where the bond issuer may not be able to make the promised payments due to bankruptcy or other financial difficulties. However, the return on corporate bonds generally reflects the level of risk, with higher interest rates often associated with riskier bonds, like 'junk bonds.' Thus, the potential for higher returns can make the risk of investing in corporate bonds worthwhile.
Investors can employ strategies such as diversification - investing in a wide range of bonds from different issuers - to manage and reduce risk. This is because even if one or a few companies fail to fulfill their bond obligations, the likelihood of all companies failing is low. This risk mitigation aligns with the principles of sharing risk through diversification.