In the context of investments in securities, if you are looking to use 'good debt' to build equity, which of the following strategies best describes this approach?

• A. Using personal savings exclusively to invest in securities, avoiding any form of borrowing.
• B. Using borrowed funds to purchase appreciating assets, such as stocks or real estate, with the expectation that returns will exceed the cost of debt.
• C. Paying off all existing debts before making any investments in securities.
• D. Investing only in risk-free government bonds to avoid any exposure to debt.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of 'good debt' in financial accounting. Good debt refers to borrowing funds to invest in assets that are expected to appreciate in value or generate returns higher than the cost of borrowing. This is a strategic approach to building equity.
2. Step 2: Analyze the given options to identify which strategy aligns with the concept of using 'good debt' to build equity. Focus on the expectation that returns from the investment will exceed the cost of debt.
3. Step 3: Evaluate the first option, 'Using personal savings exclusively to invest in securities, avoiding any form of borrowing.' This does not involve debt, so it does not align with the concept of 'good debt.'
4. Step 4: Evaluate the second option, 'Using borrowed funds to purchase appreciating assets, such as stocks or real estate, with the expectation that returns will exceed the cost of debt.' This directly aligns with the concept of 'good debt' as it involves borrowing to invest in assets expected to appreciate.
5. Step 5: Evaluate the remaining options, 'Paying off all existing debts before making any investments in securities' and 'Investing only in risk-free government bonds to avoid any exposure to debt.' Neither of these strategies involves using debt to build equity, so they do not align with the concept of 'good debt.'