What Are Held-to-Maturity (HTM) Securities?

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

How Held-to-Maturity (HTM) Securities Work

Bonds and other debt vehicles—such as certificates of deposit (CDs)—are the most common form of HTM investments. Bonds and other debt vehicles have determined (or fixed) payment schedules, a fixed maturity date, and they are purchased to be held until they mature. Since stocks do not have a maturity date, they do not qualify as held-to-maturity securities.

For accounting purposes, corporations use different categories to classify their investments in debt and equity securities. In addition to HTM securities, other classifications include "held-for-trading" and "available for sale."

On a company's financial statements, these different categories are treated differently in terms of their investment value, as well as related gains and losses.

Key Takeaways

  • Held-to-maturity (HTM) securities are purchased to be owned until maturity.
  • Bonds and other debt vehicles—such as certificates of deposit (CDs)—are the most common form of held-to-maturity (HTM) investments.
  • Held-to-maturity (HTM) securities provide investors with a consistent stream of income; however, they are not ideal if an investor anticipates needing cash in the short-term.

HTM securities are typically reported as a noncurrent asset; they have an amortized cost on a company's financial statements. 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.

HTM 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.

Unlike held-for-trading securities, temporary price changes for held-to-maturity securities do not appear in corporate accounting statements. Both available for sale and held-for-trading securities appear as fair value on accounting statements.

Advantages and Disadvantages of Held-to-Maturity (HTM) Securities

The appeal of HTM securities depends on several factors, including whether or not the purchaser can afford to hold the investment until it matures—or if there might be an anticipated need to sell before that time.

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

Since the interest rate received is fixed at the date of purchase, it's possible that the market interest rates will increase. (This would leave the investor at a relative disadvantage in this scenario because if the rates go up, the investor is earning less than if they had 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.

Example of a Held-to-Maturity (HTM) 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 August 2020, the 10-year bond pays 0.625% and comes in various maturities.

Let's say Apple (AAPL) wants to invest in a $1,000, 10-year bond and hold it to maturity. Every year, Apple will get paid 0.625%. Ten years from now, Apple will receive the face value of the bond, or $1,000. Regardless of whether interest rates rise or fall over the next 10 years, Apple will receive 0.625%, or $6.25 each year, in interest income.