Glossary
Principal
The original sum invested or borrowed, as distinct from interest or returns; for a bond, the face amount repaid at maturity.
On this page
Principal is the base amount of money in a financial arrangement: what you originally invested, lent or borrowed, before any interest or gains. On a loan it is the balance you still owe, not counting interest. On a bond it is the face amount the issuer promises to repay at maturity. Keeping principal separate from the income it earns helps you see what is actually at risk and how returns are calculated.
How it works
Interest is charged or paid as a percentage of principal. In a standard amortizing loan, such as a mortgage, each payment covers that period's interest first and the rest reduces principal, so the principal share of each payment grows over time. A bond typically pays interest only, through its Coupon, and returns all of the principal in one lump sum at Maturity.
Other meanings to know
The word appears in finance in two other senses:
- Principal trading. A broker-dealer acts "as principal" when it trades for its own account and sells to you from its inventory, rather than acting as your agent. Trade confirmations disclose which capacity was used.
- Principal protection. Some products promise to return your principal, usually only if held to maturity and subject to the issuer's ability to pay. Such a promise is only as good as the credit behind it.