What are Held to Maturity Securities?

Held to maturity securities (HTM) are debt securities that you intend to hold until maturity and that have a specified maturity date. A common example of a debt security is a corporate bond. If you purchase a $10,000 bond with five years remaining until its maturity, you must intend to hold that bond until it matures for it to be considered an HTM security

Held to Maturity Securities

What are Held-to-Maturity Securities?

A held-to-maturity security is a non-derivative financial asset that has either fixed or determinable payments and fixed maturity, and for which an entity has both the ability and the intention to hold to maturity. The held to maturity classification does not include financial assets that the entity designates as being at fair value through profit or loss, as available for sale, or as loans or receivables.

The most common held-to-maturity securities are bonds and other debt securities. Common stock and preferred stock are not classified as held-to-maturity securities, since they have no maturity dates, and so cannot be held to maturity.

An entity cannot classify any financial assets as held to maturity if it has sold or reclassified more than an insignificant amount of held-to-maturity investments before maturity during the current fiscal year or the two preceding years. In essence, the assumption is that such an organization is incapable of holding an investment to its maturity date.

This restriction does not include reclassifications that were so close to maturity or the asset’s call date that changes in the market interest rate would not have significantly impacted the asset’s fair value, or those for which the entity had already collected substantially all of the original principal, or those caused by an isolated event beyond the entity’s control.

Components of Securities

Investment Securities are classified into 3 types:

Held to maturity Securities

As mentioned before, these are to be held till maturity, and it is recorded at cost in books. Coupon or interest payment from these securities is recorded in the income statement as interest income. The value of these securities is not adjusted each year as per the market.

Trading Securities

These are debt and equity security, which can be resold. They are held at market value. Unrealized gain or loss is recorded in the income statement. These securities value is adjusted each year based on market value.

Available-For-Sale Securities

These are also the same as Trading Securities, but here unrealized gain or loss is credited into the balance sheet in an equity account. These securities are not to be expected to hold until maturity, and an investor will sell them as soon price of the bonds will go up.

One of the perfect examples of Held to maturity securities is bonds. They have a specific maturity date, and companies tend to keep it till maturity. Stocks cannot be classified in Held to maturity securities because they do not have any maturity date. If the maturity of these securities is less than one year, then it will be shown as a current asset; otherwise, it would be recorded as a fixed asset in accounting books.

Can You Sell Held to Maturity Securities?

Suppose a company decides to invest in bonds or other debt securities, then it has the choice of holding it until it matures or selling it at a premium when the interest rates decline.

Many banks or insurance companies hold these securities to hedge against inflation and have a solid secured return over a set period. With the return fixed on the balance sheet under the amortization rules, any fluctuations of prices don’t affect the balance sheet’s value, unlike available for sale or equity securities that will fluctuate with the market.

Any earned income from held to maturity securities flows from the balance sheet to the income statement via the net investment income line item.

A danger of selling the held to maturity securities for companies to consider is the potential that auditors might prohibit companies from using this category in the future.

There are one-time exceptions that allow these sales, but accountants look down on this arrangement. One of the advantages to companies using this accounting treatment is its stability, with price-fixing.

There is a one-time opportunity offered now that allows companies to reclassify their held to maturity securities. But if a company chooses to liquidate its held to maturity securities, it runs the risk of “tainting” its marketable security portfolio.

Can You Sell Held to Maturity Securities?

Accounting Treatment

The biggest difference between held to maturity securities and the other security types mentioned above is their accounting treatment. As opposed to being recorded and updated on the company’s balance sheet according to the security’s fair market value, held to maturity securities are recorded at their original purchase cost. It means that from one accounting period to another, the value of the securities on the company’s balance sheet will remain constant.

Any gains or losses resulting from changes in interest rates (for bonds and other debt instruments) will be recorded when the securities reach maturity.

Held to maturity securities on the balance sheet

HTM securities are typically reported as noncurrent assets; 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.

Held to Maturity Securities Example

Suppose an investor decides to buy debt securities such as bonds. Then the investor has two options- either to hold this security until it reaches its maturity date or to sell it at a premium when there is a decline in the interest rate.

This debt security is called held-to-maturity if the holder chooses to hold it for the entire term till the maturity date. So if the holder purchases a 10-year treasury bond and makes the choice of holding it till it matures in the tenth year, then the Treasury bond comes under held-to-maturity.

Pros

  • HTM investments allow for future planning with the assurance of their principal return on maturity.
  • Considered “safe” investments, with little to no risk.
  • The interest rate of earnings is locked in and will not change.

Cons

  • The fixed return is pre-determined, so there’s no benefit 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 are meant to be held to term.

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