9. Consider an all-equity firm with equity capitalization of $2 billion. The firm's CFO considers the following three financing strategies:

1. Issue zero-coupon senior debt with principal amount of $1 billion payable in 10 years and purchase insurance for $100 million that will pay losses on the senior debt to investors in excess of $500 million.

2. Issue zero-coupon junior debt with principal amount of $500 million payable in 10 years and issue zero-coupon senior debt with principal amount of $500 million payable in 10 years.

3. Issue zero-coupon senior debt with principal amount of $1 billion payable in 10 years with a put option attached that gives the right to investors to put the debt to the firm at maturity for the principal amount.

Which of these strategies would have the most risky senior debt?

A. Strategy 1.

B. Strategy 2.

C. Strategy 3.

D. Senior debt is equally risky in all three strategies

Correct answer is C