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.

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 US 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

Correct Answer: (d) Statement I is incorrect, but Statement II is correct

• In the event of a default, holders of US Treasury Bonds would still have legal claims to receive payments. Default means that the government is failing to meet its payment obligations as scheduled, but it does not nullify the legal claims of the bondholders. Bondholders could still pursue legal action or seek payment, although they may face delays or reduced payments.
• The US government debt is not backed by any hard assets, but only by the faith of the Government.
• US government debt, including Treasury Bonds, is backed by the “full faith and credit” of the US government, meaning it is a promise to repay based on the government’s ability to tax and print money, rather than being backed by physical assets like gold or land.
• Possible Sources: Economics and financial policy references.98