Notional principal amount

Also found in: Acronyms.

Notional principal amount

In an interest rate swap, the predetermined dollar principal on which the exchanged interest payments are based.

Notional Principal Amount

In an interest rate swap, the arbitrary amount over which interest is calculated. Suppose the two legs of the swap are a fixed interest rate, say 3.5%, and a floating interest rate, say LIBOR + 0.5%, and the notional principal amount is $1 million. In such a swap, the only things traded are the two interest rates, which are calculated over the notional principal amount. That is, the $1 million is never exchanged, but the interest is calculated with reference to it. For example, the fixed interest is 3.5% of $1 million (or $35,000). It is also called the notional value.

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References in periodicals archive ?

The amount payable by the counterparty to L also is payable at a specific interval (18 months after initiation of the swap or its earlier termination or assignment) and is calculated by reference to two separate specified indices (LIBOR and a published aviation fuel price index) upon combined notional principal amounts equal to $500 million.

Hedging market risks: accounting for notional principal contracts

Higher notional principal values are suggestive of greater involvement in derivatives, while smaller notional principal amounts generally indicate relatively lighter derivatives activity.

The interpretation of notional principal amounts for end-user interest rate derivatives, however, has to be made carefully and should consider the potential limitations of notional principal information.

Evaluating and interpreting the effectiveness of end-user interest rate derivative disclosures

The semiannual interest payments are based on a $100 million notional principal amount and are settled in arrears (Exhibit 1).

dollars on a notional principal amount of $100 million.

Correlation products and risk management issues

Notional principal amounts often are used to express the volume of these transactions but do not represent the much smaller amounts potentially subject to credit risk.

The FASB's new ED on disclosure: disclosures about off-balance-sheet exposures and credit risk concentrations are the FASB's targets

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