Consider the following statements:

Question

Statement-I: If the United States of America (USA) were to default on its debt, holders of US Treasury Bonds will not be able to exercise their claims to receive payment.

Statement-II: The USA Government debt is not backed by any hard assets, but only by the faith of the Government.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
(b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
(c) Statement-I is correct, but Statement-II is incorrect
(d) Statement-I is incorrect, but Statement-II is correct

Answer 1

(d) Statement-I is incorrect, but Statement-II is correct

Explanation:

• Statement-I: This statement is incorrect. If the USA were to default on its debt, it doesn't necessarily mean that holders of US Treasury Bonds would have no recourse to exercise their claims. The US government has mechanisms and processes to handle debt situations, and bondholders would typically have legal avenues to pursue their claims.

• Statement-II: This statement is correct. The debt issued by the US Government, including Treasury Bonds, is indeed not backed by any hard assets but rather by the full faith and credit of the United States government. This means the government's promise to pay is based on its ability to tax and generate revenue.

Therefore, the correct answer is (d) Statement-I is incorrect, but Statement-II is correct.