 NPCs involve two parties who agree contractually to pay each other amounts at specified times, based on the underlying notional amount.The simplest example of an NPC is a so-called interest rate swap, in which one party (Party A) pays the other party (Party B) an amount each quarter determined by multiplying a floating, market-determined interest rate (e.g., LIBOR) by the notional amount; and Party B pays Party A on the same date an amount determined by multiplying a fixed interest rate by the notional amount.For U.S. federal income tax purposes, currently applicable Treasury Regulations define a Notional Principal Contract as "a financial instrument that provides for the payment of amounts by one party to another at specified intervals calculated by reference to a specified index upon a notional principal amount in exchange for specified consideration or a promise to pay similar amounts."