Notional principal
Principles of Finance glossary · Time Value of Money
Definition
The reference amount on which swap or other derivative cash flows are computed.
Notional principal in plain English
Some financial contracts don't actually swap the big sum of money written into them — they just use that number as a yardstick to figure out the smaller payments the two sides owe each other. That yardstick amount is the notional principal. For example, two parties might agree to swap interest payments "on $1,000,000": nobody hands over the million dollars, but they each calculate what they owe (say, one pays a fixed rate, the other a floating rate) based on that $1,000,000 figure. It's "notional" — meaning in-name-only — because it exists to size the deal, not to change hands.
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