what is notional principal amount 
the term notional principal amount refers to the predetermined dollar amount or principal on which exchanged interest payments are based notional principal amounts are commonly used between two parties in interest rate swaps the notional principal amount is a theoretical value this means while it is predetermined by parties in the swap that dollar value isn t exchanged rather only the interest rate ever changes hands understanding notional principal amountsan interest rate swap is a contract between two parties who agree to exchange future interest payments for another these payments are based on a certain dollar value known as the notional principal amount treasury regulations defines the notional principal amount as a financial instrument that provides for the payment of amounts by one party to another at specified intervals calculated by reference to a specified index upon a notional principal amount in exchange for specified consideration or a promise to pay similar amounts 1as noted above the notional principal never changes hands which is why it is considered notional or theoretical put simply the notional principal is the assumed amount of principal involved in a financial transaction even though it is functionally separated from the transaction this means that the parties involved neither pay nor receive the notional principal amount at any time rather they only exchange interest rate payments this concept can also be applied to the underlying principal value of a debt security in interest rate swaps that s because the rates are actual components of the transaction while the principal is functionally fictitious a notional principal amount need not necessarily be a cash amount it can also be equal to equity holdings or the value of a basket of stocks 