What Are Held-to-Maturity (HTM) Securities?
Held-to-maturity (HTM) securities are investments purchased with the intent to be owned until maturity. For instance, a company’s management might invest in a bond that they plan to hold until it matures, reflecting a strategic decision toward financial stability and predictable returns. These securities receive distinct accounting treatments compared to those liquidated in the short term.
Understanding How HTM Securities Work
HTM investments primarily include bonds and other debt vehicles, such as certificates of deposit (CDs). Bonds typically have fixed payment schedules, a determined maturity date, and are designed to be held until they mature. Unlike stocks, which lack a maturity date, bonds and similar instruments are well-suited for classification as HTM securities.
For accounting purposes, corporations categorize investments in debt and equity differently: HTM securities, ‘held-for-trading’, and ‘available-for-sale’ each have unique treatment on financial statements relative to their investment value and gains/losses.
On balance sheets, HTM securities are often listed as a noncurrent asset with amortized cost considered in financial reporting. The practice of amortization adjusts the asset’s cost incrementally throughout its life. While earned interest income appears on income statements, changes in the market price of these investments do not affect the firm’s accounting statements unless held for sale.
HTM securities with less than one year till maturity can be reported as current assets, whereas those with longer maturities are stated as long-term assets at the amortized cost — including any costs incurred to date.
Key Takeaways
- Held-to-maturity (HTM) securities are intended to be owned until they reach maturity.
- Bonds and other debt instruments, like CDs, are common HTM investments.
- They provide a consistent income stream but may not suit investors needing short-term liquidity.
Advantages and Disadvantages of Held-to-Maturity (HTM) Securities
Pros
- Predictable Returns: HTM investments offer future planning certainty with a guaranteed principal return at maturity and regular interest income, uninfluenced by market conditions.
- Safety: Predominantly including government or high-credit-rated corporate debts, HTM securities are considered secure and low-risk.
Cons
- Fixed Returns: Interest rates received are locked in at purchase. Hence, they don’t benefit from potentially favorable market interest rate changes.
- Default Risk: Despite their low risk, the potential for issuer bankruptcy exists over long maturities, bearing a default risk.
Example of a Held-to-Maturity (HTM) Security
The 10-year U.S. Treasury note, a safe investment backed by the U.S. government, is an example of an HTM security. As of August 2020, a $1,000 10-year bond pays a 0.625% fixed rate of return.
For illustration, if Apple (AAPL) purchases a $1,000 10-year bond to hold until maturity, it will receive annual interest payments of 0.625%, amounting to $6.25 per year. After ten years, Apple will receive the bond’s face value of $1,000, regardless of future interest rate fluctuations.
Related Terms: Bonds, Corporate Debt, Treasury Notes, Certificates of Deposit, Fixed Income Investments.
References
- U.S. Securities and Exchange Commission. “Treasury Securities”.
- U.S. Department of Treasury. “Daily Treasury Yield Curve Rates”.
