What is a 'Held To Maturity Security'

A held-to-maturity security is purchased with the intention of holding the investment to maturity. This type of security is reported at amortized cost on a company's financial statements and is usually in the form of a debt security with a specific maturity date. Unlike held-for-trading securities, temporary price changes are not shown in accounting statements for held-to-maturity securities, and the interest income received from a held-to-maturity security is run through the income statement.

BREAKING DOWN 'Held To Maturity Security'

Accounting standards require companies to classify investments in debt or equity securities when they are purchased. The investments can be classified as held to maturity, held for trading or available for sale. Since stocks do not have a maturity date, they cannot be classified as held-to-maturity securities. Different types of investments are treated differently in accounting regarding changes in investment value, as well as the related gains and losses, some of which must go through comprehensive income within the stockholders' equity section on the balance sheet when they are realized.

Premium or Discount

When a held-to-maturity security is purchased at a premium or a discount to the security's face value, the premium paid or the discount obtained is amortized over the term of the security to decrease or increase the security's carrying value back to par at maturity. Debt securities are rarely traded at their face value after their initial issuance because of changing interest rates over time. If a debt security's coupon rate is higher than the market interest rate, the security has a premium. Conversely, if a debt security's coupon rate is lower than the market interest rate, the security has a discount.

Effective Interest

From the perspective of a security's buyer, the premium paid on a held-to-maturity security is a deduction to the coupon payments received, decreasing the effective interest earned. The discount obtained on a held-to-maturity security is an addition to the coupon payments received, increasing the effective interest earned. The effective-interest calculation is the basis for amortizing the premium or discount on a held-to-maturity security and reporting the value of the security at amortized cost.

Amortized Cost

Held-to-maturity securities by definition are not to be sold before maturity. As such, price or fair value changes in the market are not accounted for when reporting the securities' values. Instead, a held-to-maturity security is reported at its amortized cost by assigning amortized purchasing premium or discount to the security's carrying value, beginning with the purchase price, in each period over the term of the security.

In the case of a security purchased at a premium, the amount of initially amortized premium would be the effective interest (purchase price multiplied by market interest rate) deducted from the period's coupon payment. The amortized premium then reduces the purchase price to arrive at the security's carrying value for the period. This process repeats itself until the premium is fully amortized and the carrying value is reduced to the security's face value.

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