Correct Option
Both Statement-I and Statement-II are correct, and Statement-II explains Statement-I.
Statement-I asserts that if the United States of America (USA) were to default on its debt, holders of US Treasury Bonds would not be able to exercise their claims to receive payment. This is accurate. A sovereign default implies the government's failure or refusal to meet its financial obligations. While bondholders possess contractual claims, the practical enforceability of these claims becomes severely limited in such an event. There is no international legal authority with the power to compel a sovereign nation like the USA to repay its debt, nor is there any collateral that bondholders can seize directly.
Statement-II states that USA Government debt is not backed by any hard assets, but only by the faith of the Government. This statement is also correct. US Treasury securities are considered 'fiat' debt. Their value and the assurance of repayment are derived solely from the "full faith and credit" of the US government. This signifies investor confidence in the government's capacity to tax, its economic stability, and its commitment to honor its obligations, rather than being secured by tangible assets such as gold reserves or real estate.
Statement-II explains Statement-I because the absence of hard asset backing for US government debt directly contributes to the unenforceability of claims during a default. If the debt were secured by physical assets, bondholders might have a mechanism to recover their investment by liquidating those assets. However, since the debt relies entirely on the government's 'faith and credit,' a default represents a breakdown of this faith, leaving bondholders with no recourse to physical collateral. Their claims become practically unenforceable without an underlying asset to seize or a superior authority to compel payment.
Incorrect Options
Option (b) is incorrect because Statement-II provides a fundamental explanation for the situation described in Statement-I. The fiat nature of US debt, lacking hard asset backing, is precisely why claims become practically unenforceable in the event of a default.
Option (c) is incorrect because Statement-II is factually accurate in describing the nature of US government debt as being backed by 'full faith and credit' rather than physical assets.
Option (d) is incorrect because Statement-I is also factually accurate. A sovereign default by the USA would indeed render bondholders' claims practically unenforceable.