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.

  1. Held-to-Maturity Securities

    Debt securities that a firm has the ability and intent to hold ...
  2. Available-For-Sale Security

    A debt or equity security that is purchased with the intent of ...
  3. Interest Rate Risk

    The risk that an investment's value will change due to a change ...
  4. Marketable Securities

    Very liquid securities that can be converted into cash quickly ...
  5. Held-For-Trading Security

    Debt and equity investments that are purchased with the intent ...
  6. Amortized Bond

    A financial certificate that has been reduced in value for records ...
Related Articles
  1. Investing

    What's a Debt Security?

    A debt security is a financial instrument issued by a company (usually a publicly traded corporation) and sold to an investor.
  2. Investing

    Premium Bonds: Problems And Opportunities

    Learn all about premium bonds and how you can make them work for you.
  3. Investing

    Know Your Cost Basis For Bonds

    Nobody likes taxes, but tax reporting is an inevitable and unavoidable part of investing. If you buy stock, determining your costs basis is a slightly frustrating but fairly straightforward exercise. ...
  4. Investing

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
  5. Investing

    Explaining Amortization In The Balance Sheet

    Amortization occurs when an asset’s value decreases over time, usually over its estimated useful life.
  6. Investing

    Explaining Amortization In The Balance Sheet

    Amortization is important to account for intangible assets. Read to find out more about amortization.
  7. Investing

    Introduction to Treasury Securities

    Purchasing bonds that are backed by the full faith and credit of the U.S. government can provide steady guaranteed income and peace of mind. Knowing the characteristics of each type of treasury ...
  8. Investing

    What are Fixed-Income Securities?

    For a fixed-income security, the periodic return on the investment is the same throughout the life of the security. Principal is returned at the time of maturity. The payment can be in the form ...
  9. Investing

    What are Government Securities?

    Government securities are debt instruments that governments issue to raise capital.
  10. Investing

    Understanding Face Value

    Face value is the dollar value stated on a security.
  1. How do marketable securities impact a company's financial statements?

    Understand how the various components of the financial statements are impacted by investments in marketable securities owned ... Read Answer >>
  2. How do I evaluate a debt security?

    Look at a brief overview of the important factors to consider before purchasing a debt security, such as a corporate or government ... Read Answer >>
  3. What are some common examples of marketable securities?

    Learn about marketable securities and the most common types of both debt and equity securities, including common stock, bonds ... Read Answer >>
  4. How can I calculate the carrying value of a bond?

    Learn what the carrying value of a bond means, how it can change and the easiest way to calculate a bond's carrying value ... Read Answer >>
  5. What are the characteristics of a marketable security?

    Find out what it takes for a financial asset to be considered a marketable security, including its liquidity, intent of use ... Read Answer >>
  6. Does working capital include marketable securities?

    Learn how marketable securities such as Treasury bills (T-bills) and commercial papers are part of current assets and the ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center