Explanation
Contrast a bond with an interest rate swap:
- In a bond, the buyer pays the principal amount at issue (start), then receives coupons (computed off this principal) over the life of the bond, then receives the principal back at maturity (end).
- In a swap, no principal changes hands at inception (start) or expiry (end), and in the meantime, interest payments are computed based on a notional amount, which acts as if it were the principal amount of a bond, hence the term notional principal amount, abbreviated to notional.
In simple terms the notional principal amount is essentially how much of the asset or bonds a person has. For example, if a premium bond was bought for £1 then the notional principal amount would be £1. Hence the notional principal amount is the quantity of the assets and bonds.
Read more about this topic: Notional Amount
Famous quotes containing the word explanation:
“Natural selection, the blind, unconscious, automatic process which Darwin discovered, and which we now know is the explanation for the existence and apparently purposeful form of all life, has no purpose in mind. It has no mind and no mind’s eye. It does not plan for the future. It has no vision, no foresight, no sight at all. If it can be said to play the role of the watchmaker in nature, it is the blind watchmaker.”
—Richard Dawkins (b. 1941)
“Herein is the explanation of the analogies, which exist in all the arts. They are the re-appearance of one mind, working in many materials to many temporary ends. Raphael paints wisdom, Handel sings it, Phidias carves it, Shakspeare writes it, Wren builds it, Columbus sails it, Luther preaches it, Washington arms it, Watt mechanizes it. Painting was called “silent poetry,” and poetry “speaking painting.” The laws of each art are convertible into the laws of every other.”
—Ralph Waldo Emerson (1803–1882)
“Are cans constitutionally iffy? Whenever, that is, we say that we can do something, or could do something, or could have done something, is there an if in the offing—suppressed, it may be, but due nevertheless to appear when we set out our sentence in full or when we give an explanation of its meaning?”
—J.L. (John Langshaw)