Held-to-maturity (HTM) securities are investments that investor or institution intends to hold until they reach maturity.
Table of Contents
Held-to-maturity (HTM) securities are a category of investments in debt instruments, such as bonds or treasury notes, that an investor or institution intends to hold until they reach maturity. These securities are reported at their amortized cost, meaning their value on the balance sheet reflects the purchase price adjusted for any premiums or discounts over time, rather than fluctuating with market prices.
How Held-to-Maturity (HTM) Securities Work
Held-to-maturity (HTM) securities are debt investments, such as bonds or treasury bills, that an investor commits to keeping until their maturity date. When a company or individual purchases HTM securities, the primary goal is not to sell them for profit in the short term but to earn consistent interest income and recover the principal amount when the investment matures.
Accounting for Held-to-Maturity (HTM) Securities
For example, if a company buys a 3-year bond with a face value of $10,000 at a discount of $9,500, it will amortize the $500 discount over the bond’s term, gradually increasing the carrying value to $10,000 by maturity. The company also recognizes annual interest income from the bond’s coupon payments.
Only interest income and the amortized premium or discount are reported on the income statement, while fair value changes are ignored. If the investor sells the security before maturity, it may need reclassification, which can introduce additional reporting requirements. This accounting treatment ensures predictable reporting and aligns with the long-term intent of holding these securities to maturity.
Pros and Cons of HTM securities
HTM securities offer stability and predictability, making them ideal for investors seeking steady income and reduced exposure to market fluctuations. Their accounting at amortized cost shields them from the impact of market price changes, providing reliable financial reporting.
However, HTM securities lack flexibility since they cannot be sold before maturity without reclassification, which may lead to additional reporting and regulatory challenges. Additionally, their fixed returns might become less appealing in a rising interest rate environment.
What Are Examples of HTM Securities?
Bonds and other debt vehicles, like certificates of deposit (CDs), are the most common type of HTM investments. They have determined (or fixed) payment schedules and a fixed maturity date, and are bought to be held until maturity.
Closing Thoughts
Held-to-maturity (HTM) securities, as the name implies, are purchased to be owned until they mature. Different accounting treatments occur for HTM securities, vs. securities that are liquidated in the short term.
7k