What Are Held-to-Maturity(HTM) Securities?
Held-to-maturity (HTM)securitiesare 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)securitiesare 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 reportedas a noncurrent asset; they have an amortized coston a company'sfinancial 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.
FAQs
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.
What is an example of a held to maturity security? ›
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.
What is an example of HTM securities? ›
Bonds and other debt instruments, such certificates of deposit, are the most popular HTM investment types (CDs). Bonds and other debt instruments have fixed payment schedules and maturation dates and are purchased with the intention of holding them until they mature.
What happens if a bank sells HTM securities? ›
Bonds the banks plan to sell need to be classified as available-for-sale securities and accounted for at fair market value. If banks sell any HTM securities, they must reclassify all of their HTM securities as available for sale and potentially take a big loss on the securities they didn't sell.
What is the primary objective of investing in held to maturity securities? ›
Companies mostly use held to maturity securities to protect themselves against interest rate fluctuations, diversify their investment portfolios, and realize a small, low-risk capital gain over a longer period of time. The investments usually comprise debt instruments, such as government bonds or corporate bonds.
What is an example of a held-to-maturity investment? ›
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.
Why do banks have held-to-maturity securities? ›
To avoid recognizing future unrealized losses, many banks transferred available-for-sale (AFS) securities— which under GAAP are recognized at fair value with unrealized gains and losses recorded in accumulated other comprehensive income (AOCI), a component of owners' equity—to held-to-maturity (HTM) securities, which ...
Can you sell HTM securities early? ›
In addition, under ASC 320-10-25-14, a sale of a held-to-maturity security would not taint the remaining portfolio if the security is sold close to its maturity date (e.g., three months or less). This is permitted because changes in market interest rates would not significantly impact the security's fair value.
What is the HTM investment strategy? ›
Investors in HTM securities typically adopt a buy-and-hold strategy. This approach means they intend to hold the security until it matures, reaping the benefits of stable interest income over the life of the investment.
Can held to maturity securities be sold? ›
Both held-to-maturity (HTM) and available-for-sale (AFS) are methods of recording investment securities held by a company. HTM securities are held until they mature. AFS securities are sold before they mature. The former is recorded at cost minus impairment, the latter is recorded at fair value.
Furthermore, HTM securities can be repoed out to the market in exchange for cash at any time. If there are obstacles to doing so, regulators (and FASB, if the problem lies there) should remove them.
What is the HTM limit for banks? ›
At present, banks have been granted a special dispensation of enhanced Held to Maturity (HTM) limit of 23 per cent of Net Demand and Time Liabilities (NDTL), for Statutory Liquidity Ratio (SLR) eligible securities acquired between September 1, 2020 and March 31, 2023, until March 31, 2023. 3.
How to account for held to maturity securities? ›
It was noted earlier that certain types of financial instruments have a fixed maturity date; the most typical of such instruments are “bonds.” The held-to-maturity securities are normally accounted for by the amortized cost method.
What are the characteristics of held-to-maturity securities? ›
The held-to-maturity securities are very predictable as they have a predetermined return, which is locked at the time of buying, and market fluctuations have no impact on their value. These securities are very safe and have no risk attached as they are predictable and predetermined.
What are held-to-maturity securities always classified as? ›
Always classified as Long-Term Investments. Debt securities that a company intends and is able to hold to maturity. Equity securities that a company intends and is able to hold to maturity. Equity securities where significant influence involved.
What are held-to-maturity investments normally reported at? ›
Held-to-maturity debt securities are reported at amortized cost. This is due to the securities being held to collect contractual cash flows.
What are hold to maturity securities? ›
Held-to-maturity securities are debt securities that will be held by the company until the debt matures. Therefore, unrealized gains and losses will not be recognized in the financial statements because they do not mark to market at the end of the period.
What is an example of a maturity risk? ›
Maturity risk premium – Maturity relates to the date that the bond must be repaid. The further out the maturity date is, the bigger the risk is for the lender. For example, if a bond has a term of 5 years vs 30 years, there would be incremental risk for the extra 25 years that the bond is outstanding.
What is an example of maturity in banking? ›
For example, if a company issues a $10,000 bond that pays a 3% annual coupon and the bond matures in five years, the bondholder will receive $300 each year, or $1,500 over the life of the bond. The principal amount of $10,000 will be returned at the end of five years. The bond has a maturity value of $11,500.
What is an example of a bond maturity? ›
It informs the investors about when they would receive their invested principal back. For example, a 30-year mortgage has a maturity date three decades from the date it was issued and a 2-year bond has its maturity date twenty-four months from when it was first issued.
