US Treasury Bonds & Default
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?
Options
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
Explanation
Statement-I is incorrect; a default means a failure to pay on time, but it does not legally erase the bondholder's right to exercise claims. The debt remains owed. Statement-II is correct; US Treasury bonds are classic fiat debt, meaning they are not backed by hard assets like gold, but entirely by the "full faith and credit" of the US Government.
Answer: (d).
Question details
Year
2024
Paper
GS Paper 1
Question
Q51
Subject
Economy
Sub-topic
Macroeconomics & Growth
Type
Assertion-Reason
Difficulty
Hard
Nature
Static
Source hint
US Debt Ceiling Crisis & Treasury Default Contingencies 2023
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