What is Held-to-Maturity Securities
Held-to-maturity securities are purchased to be owned until maturity. This type of security is reported as an amortized cost on a company's financial statements and is generally in the form of a debt security with a specific maturity date.
Unlike held-for-trading securities, temporary price changes for held-to-maturity securities do not appear in corporate accounting statements. Instead, the interest income received from a held-to-maturity security is run through the income statement.
BREAKING DOWN Held-to-Maturity Securities
Held-to-maturity securities are one of the leading categories that corporations use to classify their investments in debt or equity securities. Classifications include:
- held for trading
- available for sale
The most common form of held-to-maturity investments are bonds. Since stocks, or shares in a company, do not have a maturity date, they do not qualify as held-to-maturity securities.
These classifications exist for accounting purposes, as each type of security is treated differently regarding changes in investment value, as well as the related gains and losses, in a company’s financials. Held-to-maturity securities are only reported as current assets if they have a maturity date of one year or less. Otherwise, they 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). By contrast, investments held for trade or available for sale are listed at fair value.
Pros and Cons of Held-to-Maturity Securities
The appeal, or lack thereof, of these investments depends on several factors, including whether the purchaser can afford to hold this investment until it matures or if they anticipate having the need to sell or “cash in” before that time.
- Held-to-maturity securities have a predictable, pre-determined return that is locked in at the time of purchase and, therefore, is not vulnerable to market fluctuations.
- These types of securities are considered remarkably “safe” investments, with little to no risk.
- Investors can make long-term financial plans based on these securities since the purchaser has firm details about when they will see the return, and how much that will be.
- These securities are not good options for investors who may need to liquidate assets shortly, or who prefer investments that offer the option of cashing in at any time if necessary.
- The return is fixed and pre-determined, so there is no possibility for unexpectedly high returns even with favorable market conditions.