Notional Principal

Principal balance underlying a Swap transaction, and the amount used to compute swap payments in an Interest Rate Swap or Currency Swap. Once the obligation to pay interest is separated from the principal on the underlying security, it becomes a notional amount, and is the fictitious principal generating the cash flows in a swap agreement. The two parties to a swap agreement trade the cash flow yield, not the notional amount. Interest payments accrue as with any ordinary interest-bearing security, even though the investor in fact receives only interest payments.