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Consider the following statements

,

Consider the following statements:

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:

(a)

Explanation

Answer: (a) Explanation: • 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. o This statement is correct because if the USA defaults on its debt, it means the government is unable to meet its debt obligations, resulting in bondholders not receiving the payments they are entitled to. • Statement-II: The USA Government debt is not backed by any hard assets, but only by the faith of the Government. o This statement is also correct as US government debt is indeed backed by the government’s creditworthiness and its ability to raise taxes and manage its finances, rather than by specific assets. Statement-II explains why Statement-I is true. The reason bondholders would not be able to exercise their claims in the event of a default is that the government debt is not backed by tangible assets but rather by the government’s creditworthiness. If that creditworthiness is compromised (i.e., the government defaults), then the bondholders’ claims cannot be fulfilled.