What Are Held-To-Maturity – HTM Securities

Held-to-maturity (HTM) securities are purchased to be owned until maturity. A company's management might invest in a bond that they plan to hold to maturity. As a result, there are different accounting treatments for held-to-maturity securities compared to securities that are to be liquidated in the short term.

Held-To-Maturity Securities Explained

Held-to-maturity securities are one of the leading categories that corporations use to classify their investments in debt and equity securities. Classifications include:

  • Held-to-maturity
  • Held for trading 
  • Available for sale

The above classifications exist for accounting purposes since each type of security is treated differently regarding changes in investment value, as well as the related gains and losses, on a company’s financials.

Key Takeaways

  • Held-to-maturity securities are purchased to be owned until maturity.
  • Bonds are typically used by the management of companies as held-to-maturity securities.
  • Held-to-maturity securities provide investors with a consistent income stream but are not ideal if the investor might need cash in the short term.

Accounting for Held-To-Maturity Investments

Bonds and other debt vehicles, such as certificates of deposit (CDs), are the most common form of held-to-maturity investments. These investments have determined or fixed payment schedules and a fixed maturity date. Also, these assets are purchased to hold them until they mature.

This type of security is reported as a noncurrent asset and have an amortized cost on a company's financial statements and is generally in the form of a debt security with a specific maturity date. Amortization is an accounting practice that adjusts the cost of the asset incrementally throughout its life. Earned interest income appears on the company's income statement, but changes in the market price of the investment do not change on the firm's accounting statements.

Held-to-maturity securities are only reported as current assets if they have a maturity date of one year or less. Securities with maturities over one year are stated as long-term assets and appear on the balance sheet at the amortized cost—meaning the initial acquisition cost, plus any additional costs incurred to date.

The Difference in Held-For-Trading Securities

As mentioned earlier, unlike held-for-trading securities, temporary price changes for held-to-maturity securities do not appear in corporate accounting statements. Since stocks, or shares in a company, do not have a maturity date, they do not qualify as held-to-maturity securities. Both available for sale and held-for-trading securities appear as fair value on accounting statements.

Pros and Cons of Held-to-Maturity Securities

The appeal, or lack thereof, of held-to-maturity securities depends on several factors, including whether the purchaser can afford to hold this investment until it matures or if there might be an anticipated need to sell or “cash in” before that time.

The investor has the predictability of regular returns from the held-to-maturity investment. These regular earnings allow the holder to make plans for the future, knowing this income will continue at the set rate and the final return of capital upon maturity.

Since the interest rate received is fixed at the date of purchase, the investor may experience the risk that market interest rates will increase. It the rates go up, the investor is earning less than if they have the funds invested at the current, higher market rate.

For the most part, HTM securities are long-term government or high credit rated corporate debt. However, investors must understand the risk of default if, while holding the long-term debt, the underlying company declares bankruptcy.

Pros

  • HTM investments allow for future planning with the assurance of their principal return on maturity.

  • Considered “safe” investments, with little to no risk.

  • Interest rate of earnings is locked in and will not change.

Cons

  • The fixed return is pre-determined, so there's no benefiting from a favorable change in market conditions.

  • The risk of default, while slight, still must be considered.

  • Held-to-maturity securities are not short term investments but meant to be held to term.

Real-World Example of a Held-to-Maturity Security

The 10-year U.S. Treasury note is backed by the U.S government and is one of the safest investments for investors. The 10-year bond pays a fixed rate of return. For example, as of March 26, 2019, the 10-year bond pays 2.40% and comes in various maturities.

Let's say Apple Inc. (AAPL) wants to invest in a $1,000 10-year bond and hold it to maturity. Apple will get paid each year 2.40% and the face value the bond or $1,000 in 10 years from now. Regardless of whether interest rates rise or fall over the next 10years, Apple will receive 2.40% or $24 each year in interest income.