What term best describes the situation when an investor's rate of return on an investment exceeds the cost of borrowing?

The situation described involves an investor earning a rate of return on their investment that is greater than the cost of borrowing funds to make that investment. This scenario is best referred to as favorable leverage.

When the returns on the investment exceed the borrowing costs, leverage becomes advantageous, allowing the investor to utilize borrowed money to increase their overall return. Favorable leverage leads to enhanced profitability because the investor is effectively using external capital to amplify their gains.

In contrast, negative leverage occurs when the cost of borrowing surpasses the rate of return on the investment, which detracts from the investor's overall profits. Neutral leverage happens when the returns and borrowing costs are equal, resulting in no net gain or loss from the leverage used. Risky leverage typically refers to the potential for higher returns at greater risk, but it does not specifically address the relationship between rates of return and borrowing costs.

Therefore, the term that correctly captures the situation where the investor benefits from leveraging their investment due to a favorable difference between returns and borrowing costs is indeed favorable leverage.