What are Held to Maturity Securities?
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.
A held-to-maturity security is a non-derivative financial asset that has either fixed or determinable payments and a fixed maturity, and for which an entity has both the ability and the intention to hold to maturity. The held to maturity classification does not include financial assets that the entity designates as being at fair value through profit or loss, as available for sale, or as loans or receivables.
The most common held-to-maturity securities are bonds and other debt securities. Common stock and preferred stock are not classified as held-to-maturity securities, since they have no maturity dates, and so cannot be held to maturity.
An entity cannot classify any financial assets as held to maturity if it has sold or reclassified more than an insignificant amount of held-to-maturity investments before maturity during the current fiscal year or the two preceding years. In essence, the assumption is that such an organization is incapable of holding an investment to its maturity date.
This restriction does not include reclassifications that were so close to maturity or the asset’s call date that changes in the market interest rate would not have significantly impacted the asset’s fair value, or those for which the entity had already collected substantially all of the original principal, or those caused by an isolated event beyond the entity’s control.
The cost of a held to maturity investment is not adjusted to fair value during the holding period; there is no point in doing so, since (as the name implies) the holder intends to retain ownership until the maturity date of the investment, at which point the face value of the investment will be redeemed.
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.1 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.2
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.
Advantages of a Held-to-Maturity (HTM) Security
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. So even if the market value fluctuates, the return will stay the same since the holder will hold the bond until maturity.
These investments help the investors make long-term financial plans as the purchaser already has confirmed details about when they will receive the return and the amount of return they will get on maturity.
Disadvantages of a Held-to-Maturity (HTM) Security
Investing in these securities is not a good option if the investors plan to liquidate assets in a short period or for those who prefer investments, which gives the option of cashing in whenever necessary.
Since held to maturity, investment has already determined returns, which are fixed, so there is no possibility of getting higher returns even if there is a considerable increase in the market and favorable conditions exist in the market.