Finance Explained

Interest calculated only on the original principal amount, not on interest that has already built up. The formula is Simple Interest = Principal × Annual Rate × Time, so a $10,000 loan at 6% for 5 years costs $3,000 in interest. Unlike compound interest, which earns “interest on interest,” simple interest grows in a straight line, making it common in products like auto loans, personal loans, and bonds.

APR (Annual Percentage Rate) is the yearly cost of borrowing money, expressed as a percentage. It usually includes the interest rate plus certain fees, which makes it a fuller measure of a loan’s true cost and the standard tool for comparing financial products side by side.

APY (Annual Percentage Yield) is the actual annual return on your savings or investment, and unlike the plain interest rate it factors in compound interest. That is why APY is usually a little higher than the stated rate and gives a more accurate picture of what you will really earn in a year.

The total value of what you own minus what you owe, or your assets minus your liabilities, calculated as Net Worth = Total Assets − Total Liabilities. It isn’t your income, checking balance, or lifestyle, but a financial snapshot of where you stand at one point in time. It can be negative if your debts exceed your assets, which is simply a starting point rather than a permanent label.

The money a company keeps from sales after subtracting the direct costs of producing its goods or services, known as the cost of goods sold (COGS). Calculated as revenue minus COGS, it shows how efficiently a company turns production into profit, before accounting for overhead like rent, salaries, taxes, and interest. It’s often expressed as a gross profit margin (gross profit divided by revenue) to compare profitability across companies or over time.

Ownership value in an asset after subtracting any debts or liabilities tied to it. In a home, it’s the property’s market value minus what you still owe on the mortgage; in a company, it’s the value of shareholders’ stake after liabilities are subtracted from assets. In short, it represents the portion you truly own, and it grows as you pay down debt or as the asset’s value rises.

Interest that has accumulated on a loan or investment but hasn’t yet been paid out or added to the balance. It builds up over time between payment dates, so on a bond a buyer typically pays the seller the interest earned since the last payment, and on a loan it’s the interest piling up between billing cycles. It’s an accounting recognition of interest earned or owed, distinct from interest that’s actually been paid.