https://www.omg.or...y/explanatoryNote
| - For certain kinds of derivative instruments, including but not limited to swaps, the notional amount indicates face amount of a swap upon which the payment streams for that swap are based. While this is typically constant throughout the lifetime of a contract, it can be accreting, amortizing, or custom, such as in the case of a notional step schedule.
- The notional amount (or notional principal amount or notional value) on a financial instrument is typically the face amount used to calculate payments made on that instrument. This amount generally does not change and is thus referred to as notional.
When applied to a swap this is the amount used for calculating the actual value of the interest due. Also known as notional value when describing derivative contracts in the options, futures, and currency markets, this term is often used to value the underlying asset in a derivatives trade. It can be the total value of a position, how much value a position controls, or an agreed-upon amount in a contract.
An example is that a firm might have a variable rate loan on $100,000 but decide to swap only $40,000. The $40,000 is the notional amount of the swap and becomes the amount on which interest is paid.
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