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?

The correct option is Both Statement-I and Statement-II are correct and Statement-II explains Statement-I.

Analysis of Statement-I:
A sovereign default occurs when a government fails to meet its debt obligations, such as paying interest or principal to bondholders. US Treasury Bonds represent debt issued by the United States government. If the USA defaults on its debt, it means the government is either unwilling or unable to make these payments. Consequently, holders of US Treasury Bonds will not be able to exercise their claims to receive their scheduled payments. Therefore, Statement-I is correct.

Analysis of Statement-II:
US Government debt, like that of most modern nations, is fiat-based. This means it is not backed by gold, silver, or any other tangible hard assets. Instead, it is backed solely by the "full faith and credit" of the US Government—essentially, the government's ability to raise revenue through taxation and its authority to print money. Therefore, Statement-II is also correct.

Relationship between Statement-I and Statement-II:
Because the debt is not backed by physical collateral or hard assets, bondholders have no physical assets to claim or liquidate to recover their money in the event of a default. Their claim relies entirely on the government's promise and financial integrity (its faith). Once that faith is broken through a default, there is no underlying physical asset backing the bonds that holders can seize to satisfy their claims. Thus, Statement-II explains why Statement-I is true. Statement-II is the underlying reason why a default makes the claims unexercisable for payment.