Notional principal amount


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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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