Notional Value

Written By
Paul Tracy
Updated June 12, 2021

What is Notional Value?

Notional value is the total asset value of a hedged position.

How Does Notional Value Work?

Consider an interest rate swap, which is a contractual agreement between two parties to exchange interest payments. Let's assume Charlie owns a $1 million investment that pays him LIBOR + 1% every month. As LIBOR goes up and down, the payment Charlie receives changes. Now assume that Sandy owns a $1 million investment that pays her 1.5% every month. The payment she receives never changes.

Charlie decides that he would rather lock in a constant payment and Sandy decides that she'd rather take a chance on receiving higher payments. So Charlie and Sandy agree to enter into an interest rate swap contract.

Under the terms of their contract, Charlie agrees to pay Sandy LIBOR + 1% per month on a $1 million principal amount. This is the notional value. Sandy agrees to pay Charlie 1.5% per month on the $1 million notional amount.

Why Does Notional Value Matter?

Notional values are most discussed in derivatives and currency transactions because those transactions often involve hedging, which means that a small amount of money can influence a very large investment. The term helps distinguish between the amount of money actually invested from the amount of money involved in the whole transaction.

Ask an Expert
All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Notional Value.
Be the first to ask a question

If you have a question about Notional Value, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers.

If you have a question about Notional Value, then please ask Paul.

Ask a question Read more from Paul

Read this next

Paul Tracy - profile
Ask an Expert about Notional Value

By submitting this form you agree with our Privacy Policy

Don't Know a Financial Term?
Search our library of 4,000+ terms