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Notional Principal Amount

Definition - What does Notional Principal Amount mean?

A notional principal amount is a theoretical sum of money that is determined at a set rate between two parties which represents the value of the interest being exchanged on any principal loan sum. There is no cash that changes hands in a notional principal amount. It is just a bar that is set to determine what two parties expect out of a transaction wherein many times both have interest assumable.

Justipedia explains Notional Principal Amount

A notional principal amount is considered between banks and their lenders. It helps to ensure that if there is a fall in the economy there can be a figure referred back to and added to the principal in some form if the interest rate goes below that which was expected between parties at the time of the loan.

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