All Courses

Home

Economy

External Sector

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 no

Question

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?

Both Statement-I and Statement-II are correct and Statement-II explains Statement-I

Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I

Statement-I is correct, but Statement-II is incorrect

Statement-I is incorrect, but Statement-II is correct

Solution

Correct option is D

Statement-I is incorrect.

In the event of a default, holders of US Treasury Bonds would still retain their legal claims to receive payments. A default indicates that the government is unable to meet its payment obligations as scheduled, but it does not eliminate the bondholders' legal rights to the payments. Bondholders could still pursue legal action or seek payment, though they may encounter delays or receive reduced payments.

Statement-II is correct.

US government debt, such as Treasury Bonds, is not backed by physical assets like gold or land. Instead, it is backed by the "full faith and credit" of the US government, which means the government's ability to tax and generate revenue to meet its debt obligations.