Which bond is tied to compensating for defalcations in securities investments?

The blue sky bond is specifically designed to protect against defalcations, which refers to the embezzlement or misappropriation of funds, in securities investments. This type of bond is often required by state regulators for broker-dealers and investment advisors as a way to ensure that investors are protected in the event of financial misconduct. It serves as a safeguard for consumers, demonstrating that the individual or entity holding the bond has the financial backing to cover potential losses arising from such defalcations.

In contrast, the other options serve different purposes: a supply bond relates to the provision of goods or services; an appeal bond is used in the context of appealing a court decision; and a lost instruments bond deals with the replacement of lost financial instruments (like stocks or bonds) rather than protecting against malfeasance. The specific function of the blue sky bond in ensuring accountability in securities dealings distinguishes it as the correct answer in this context.