Held-to-Maturity (HTM) Securities

What Are Held-to-Maturity (HTM) Securities?

Held-to-maturity (HTM) securities are purchased to be owned until maturity. For instance, a company's management could invest in a bond that they plan to hold to maturity. There are different accounting medicines for HTM securities compared to securities that are liquidated in the short term.

How Held-to-Maturity (HTM) Securities Work

Bonds and other debt vehicles — like certificates of deposit (CDs) — are the most common form of HTM investments. Bonds and other debt vehicles have determined (or fixed) payment plans, a fixed maturity date, and they are purchased to be held until they mature. Since stocks don't have a maturity date, they don't qualify as held-to-maturity securities.

For accounting purposes, corporations utilize various categories to group their investments in debt and equity securities. Notwithstanding HTM securities, different characterizations incorporate "held-for-trading" and "ready to move."

On a company's financial statements, these various categories are dealt with diversely in terms of their investment value, as well as related gains and losses.

HTM securities are regularly reported as a noncurrent asset; they have an amortized cost on a company's financial statements. Amortization is an accounting practice that changes the cost of the asset steadily all through its life. Earned interest income shows up on the company's income statement, however changes in the market price of the investment don't change on the association's accounting statements.

HTM securities are possibly reported as current assets on the off chance that they have a maturity date of one year or less. Securities with maturities more than one year are stated as long-term assets and show up on the balance sheet at the amortized cost — meaning the initial acquisition cost, plus any extra costs incurred to date.

Dissimilar to held-for-trading securities, transitory price changes for held-to-maturity securities don't show up in corporate accounting statements. Both ready to move and held-for-trading securities show up as fair value on accounting statements.

Benefits and Disadvantages of Held-to-Maturity (HTM) Securities

The appeal of HTM securities relies upon several factors, including whether the purchaser can afford to hold the investment until it matures — or on the other hand assuming there may be an anticipated need to sell before that time.

The investor has the consistency of standard returns from HTM investments. These standard earnings permit the holder to make arrangements for the future, realizing this income will go on at the set rate, until the last return of capital upon maturity.

Since the interest rate received is fixed at the date of purchase, it's conceivable that the market interest rates will increase. (This would leave the investor in a difficult spot in this scenario since, in such a case that the rates go up, the investor is earning not exactly on the off chance that they had the funds invested at the current, higher market rate).

For the most part, HTM securities are long-term government or high-credit-rated corporate debt. Be that as it may, investors must figure out the risk of default if, while holding the long-term debt, the underlying company declares bankruptcy.

Pros

HTM investments allow for future planning with the assurance of their principal return on maturity.
Considered “safe” investments, with little to no risk.
Interest rate of earnings is locked in and will not change.

Cons

The fixed return is pre-determined, so there's no benefiting from a favorable change in market conditions.
The risk of default, while slight, still must be considered.
Held-to-maturity securities are not short term investments but meant to be held to term.

## Illustration 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 most secure investments for investors. The 10-year bond pays a fixed rate of return. For instance, as of August 2020, the 10-year bond pays 0.625% and comes in different maturities.

Suppose Apple (AAPL) needs to invest in a $1,000, 10-year bond and hold it to maturity. Consistently, Apple will get compensated 0.625%. A decade from now, Apple will receive the face value of the bond, or $1,000. Whether or not interest rates rise or fall over the course of the next 10 years, Apple will receive 0.625%, or $6.25 every year, in interest income.

Features

Held-to-maturity (HTM) securities give investors a steady stream of income; nonetheless, they are not great on the off chance that an investor expects to require cash in the short-term.
Held-to-maturity (HTM) securities are purchased to be owned until maturity.
Bonds and other debt vehicles — like certificates of deposit (CDs) — are the most common form of held-to-maturity (HTM) investments.