Latency is the time it takes for a packet to travel from point A to point B. The total latency in a packet network will consist of propagation time plus handling time by routers. Propagation time will be a factor of the speed of light. Speed though optical fiber will be about .5 c, meaning 50% of the 300,000,000 meters per second that light travels at. This is where the 5 microseconds per kilometer is derived from.
Each router that handles a packet on the path from point A to point B will take some time to do it's job. With no load (light traffic level) that is usually 1-2 milliseconds, but will quickly rise if the link becomes full and the router has to start buffering packets before sending. So a packet that crosses the country through 15-20 routers will often have a round trip latency of over 200 milliseconds even though the propagation component is only 40-50 milliseconds.
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