Business Glossary

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.