Held-to-Maturity Securities

A non-derivative financial asset with fixed or determinable payments and a fixed maturity that an entity has the capacity and intend to hold to maturity is referred to as a held-to-maturity security. The classification of financial assets as held to maturity excludes those that the entity designates as being at fair value through profit or loss, available for sale, loans, or receivables.

The majority of securities held to maturity are bonds and other debt instruments. Since common stock and preferred stock have no maturity dates and can thus not be held to maturity, they are not categorized as securities that can be.

How Held-to-Maturity (HTM) Securities Work

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. Due to the absence of a maturity date, stocks are not regarded as held-to-maturity securities.

For accounting purposes, corporations categorize their stock and debt holdings into different divisions. In addition to HTM securities, other classifications include "held-for-trading" and "available for sale."

On a company's financial accounts, these various groups are handled differently in terms of their investment value and any related gains or losses.

Example of a Held-to-Maturity (HTM) Security

The 10-year U.S.One of the safest investments for investors is a Treasury note, which is backed by the United States government.

The yield on the 10-year bond is set. For instance, the 10-year bond has several maturities and pays 0.625% as of August 2020.

Consider a scenario where Apple (AAPL) decides to purchase a $1,000, 10-year bond and retain it until it matures. Apple will be paid 0.625% annually. Apple will collect the bond's $1,000 face value ten years from now. Regardless of whether interest rates increase or decrease over the following ten years, Apple will get interest income of 0.625%, or $6.25 annually.

Advantages Of HTM Securities

The risk of holding securities until maturity is typically relatively low. Returns are basically guaranteed, if the bond issuer doesn't default.

Since the returns on a bond are already pre-determined at the time of purchase, they are not sensitive to news events or industry trends (i.e., the coupon payments, face value, and maturity date).

Bonds are lower beta assets that let investors plan their long-term investment portfolios and spread the risk in their holdings.

Disadvantages Of HTM Securities

Securities held to maturity have an impact on the company's liquidity. Because they agree to store these securities until maturity, businesses cannot realistically rely on them to be sold if quick cash is needed.

Since the returns on these securities are predetermined, as was already mentioned, there is limited upside potential while there is downside protection. Even if the entire financial market increases, the company's returns won't climb.

Key Takeaways

• When purchasing HTM securities, the goal is to hold them until maturity.
• The most popular type of held-to-maturity (HTM) assets are bonds and other debt instruments, like certificates of deposit (CDs).
• Hold-to-maturity (HTM) securities offer investors a steady source of income, but they are not the best option if the investor expects to require cash soon.