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?

Answer: A. Both statements are correct AND Statement-II explains Statement-I (in the sense the question intends). Note: The official answer key marks A here, treating the question liberally. In economics literature, a US default would not literally erase claims, but practically holders would face delayed or partial payment with no recourse against hard assets. Statement-I: If the US defaults, Treasury Bond holders cannot enforce their claims for payment in the conventional sense. There is no hard collateral they can seize. Treated as practically correct. Statement-II: US Government debt is NOT backed by hard assets like gold or land. It is backed by the 'full faith and credit' of the US Government and its taxing power. This is the textbook description of fiat sovereign debt. The fact that the debt has no hard backing (II) is exactly why holders have limited recourse in default (I). So II explains I. Source: US Treasury / IMF Sovereign Debt definitions.