The nominal value that is used to calculate swap payments. For example, in an interest rate swap, each period’s interest rates are multiplied by the notional principal amount to determine the value of each counterparty’s payment. Suppose the swap’s notional principal amount is USD 10 million, and its two legs are a fixed interest rate (4%) and a floating interest rate (LIBOR+ 35 basis points). It follows that, if LIBOR is 3.7% at a given resetting date, the fixed-rate payer will receive a net amount based on the difference between (4.05%- 4%)x USD 10 million = USD 50,000. Actually, there is no point in exchanging the notional amount, whilst just the net credit amount is paid to the corresponding counterparty.

Such a nominal value is also used in other types of derivatives such as interest rate caps, futures, etc.

The notional principal amount is also called the notional value.