Interest, as a term, may have different connotations in different contexts and uses. In a given context, it refers to the cost of money borrowed from a lender in a direct (by means of loans) or indirect way (by means of debt). Differently stated, interest is an amount charged by a lender to a borrower against the latter’s use of the loaned funds. It is usually expressed as a percentage of the principal amount borrowed, and can be either simple or compound. For a lending entity, interest is a revenue item (it adds to the entity’s assets), while for a borrowing entity, it is an expense (it results in a decrease in its assets).
In a completely different context, interest refers to the equity ownership of a person (legal or natural) in an entity or specific assets of an entity, expressed in absolute monetary terms or as a percentage. For example, an investing entity may own 20,000 shares of an investee entity (with a base of 100,000 shares outstanding), in which case the investing entity has an equity interest or ownership interest of 20% (in the investee).
Interest in an entity is an important determinant of control (who controls what), and as a result who controls the entity at large. Investors who collectively own less than 50% of an entity’s total shares in terms of voting rights are said to be holding minority interest. Principally, minority investors don’t exercise control over an entity (by way of votes), and accordingly have no “tangible” influence in the decision-making process.
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