Definition
Held to Maturity (HTM) Securities are financial investments that a company intends to own until they mature, meaning until the end of their term. These are typically debt securities like bonds. Companies classified as HTM Securities are intended to generate earnings from the interest they produce during their term.
Key Takeaways
- Held to Maturity Securities refers to long-term financial investments that a company intends and has the ability to hold until they mature. They could be bonds or other fixed income securities.
- These securities are reported at amortized cost on the company’s balance sheet. Amortized cost is the original investment cost minus principal payments, plus or minus amortization of any discount or premium, minus any impairment write-downs.
- Unlike trading and available-for-sale securities, changes in the market value of held-to-maturity securities are not reflected in the income statement until they are sold, mature, or are impaired, which can help protect a company’s earnings from short-term price volatility.
Importance
Held to Maturity (HTM) securities are vitally important in finance because they represent a commitment from the investor to hold a fixed income security until it matures.
This gives predictability for both income flows and future value, as these securities are to be held irrespective of fluctuations in market value.
For instance, bonds bought with the intention of holding until their principal repayment date fall under this category.
This classification also impacts how these securities are accounted for in financial statements, with HTM securities logged at their amortized cost, not their current market value, which can help manage the balance sheet appearance.
Hence, understanding HTM securities is critical to both investment strategy and accurate financial reporting.
Explanation
Held to Maturity (HTM) securities play a critical role in financial institutions’ and corporations’ investment strategies. By buying these financial instruments, the institutions or corporations plan to hold them until they mature, rather than trading them in the open market.
The purpose of these securities for an investor is to provide a reliable stream of cash flow. Institutions or corporations can estimate and plan their future incoming cash flows from the periodic interest income and the promise of receiving the principal back at the maturity date, allowing them to budget for other investment opportunities or operational expenses.
Businesses use these securities as a way to manage their portfolio’s risk due to market fluctuations. Since HTM securities are not typically affected by short-term market volatility, they enable investors to maintain a steady income stream, even in unpredictable market environments.
The changes in market value of these types of securities are not recognized in financial statements unless there is a significant risk, that the investor will not get back all of their initial investment because of credit default of the issuer of the security, which ensures investor’s principal safety. Whether it be a corporation securing its capital investment and ensuring a predictable return, or a bank using them to generate a reliable source of income, Held to Maturity securities offer a certain degree of financial security and predictability.
Examples of Held to Maturity Securities
Government Bonds: These are a common example of held-to-maturity securities. For instance, the U.S. government might issue a 10-year Treasury bond to an investor. The investor plans to hold this bond until it matures in 10 years, at which point they can redeem it for its face value. The U.S. government pays the investor a fixed interest rate every year until the bond matures.
Corporate Bonds: Corporations often issue bonds as a way of raising capital. If a corporation issues a 5-year bond with a fixed interest rate to an investor and the investor intends to hold this bond until maturity, this is considered a held-to-maturity security. Like government bonds, corporate bonds pay the investor a fixed interest rate every year until the bond matures.
Municipal Bonds: These are bonds issued by a city, county, or state to finance public projects such as building a school or improving infrastructure. If these are bought with the intent to keep until they reach the end of their term, they are also considered held-to-maturity securities. They typically offer lower yields than other forms of investment, but the interest is often exempt from federal, state, and local taxes.
Held to Maturity Securities FAQ
What are Held to Maturity Securities?
Held to Maturity Securities are financial securities that a company intends and is able to hold until they mature. They are initially recorded at cost in the balance sheet and later, they are adjusted for amortization of discounts or premiums.
What are some examples of Held to Maturity Securities?
Common examples of held to maturity securities include bonds or other debt instruments. The company holding these securities receives regular interest payments until the bond’s maturity date, at which point they receive the bond’s face value.
How are Held to Maturity Securities calculated and reported?
Held to Maturity Securities are initially reported at their original cost and over time, they are adjusted to reflect their discounted or premium value. They are reported as a non-current asset on the balance sheet.
What are the advantages of holding securities until maturity?
The main advantage of holding securities until maturity is the certainty of returns. The company receives regular interest payment and the principal amount is returned at the end of the maturity date. Additionally, the value of Held to Maturity Securities is not affected by the fluctuations in the market, providing a buffer against volatility.
What happens if a company decides to sell Held to Maturity Securities before their maturity date?
If a company decides to sell Held to Maturity Securities before their maturity date, it could result in a reclassification of these securities. It could also lead to the securities being tainted, which means that a company might not be able to classify certain investments as held-to-maturity for a certain period.
Related Entrepreneurship Terms
- Amortization
- Maturity Date
- Fixed-Income Investments
- Interest Rate Risk
- Credit Risk
Sources for More Information
- Investopedia: A comprehensive resource for definitions and explanations of financial terms and concepts. They provide detailed articles and tutorials on a wide range of finance topics, including ‘Held to Maturity Securities’.
- Corporate Finance Institute: An educational platform offering free and premium courses and resources on a wide range of finance topics. Their articles often delve deep into the technical aspects of finance.
- Accounting Tools: A reliable source for comprehensive information related to accounting. It offers detailed explanations about various accounting terms and concepts, including ‘Held to Maturity Securities’.
- The Balance: This site offers expertly crafted financial information and advice. From in-depth, comprehensible coverage of various financial topics, it can also provide useful insights on ‘Held to Maturity Securities’.
