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.

Statement-II is correct. US Treasury securities are famously backed only by the 'full faith and credit' of the United States government — that is, by its sovereign promise to pay, supported by its powers to tax, borrow and issue currency. Unlike a secured corporate bond, US government debt is not collateralised by any hard asset such as gold reserves, land or physical property pledged to the bondholders.

Statement-I is correct. Because there is no hard asset backing the debt (Statement-II), bondholders have no collateral to seize or attach if the United States were to default. The 'claim' to payment is essentially a claim against the sovereign's promise, not against any identifiable asset. In the event of an actual default, holders of US Treasury Bonds would therefore have no practical means of exercising their claims — there is nothing concrete to enforce the claim against. (This is precisely why a US default is considered catastrophic: there is no fallback collateral.)

Statement-II is the reason Statement-I holds: it is the absence of hard-asset backing (II) that leaves bondholders unable to exercise their claims on default (I). Hence Statement-II correctly explains Statement-I, and the answer is option A.