Definition of Held-to-Maturity Securities (HTM)

Investors buy held-to-maturity (HTM) assets to hold till maturity. A company’s management may buy a bond to retain until maturity. HTM and short-term liquidated securities have differing accounting procedures.

HTM Securities Function

The majority of HTM investments are bonds and debt instruments like CDs. Fixed payment schedules, maturity dates, and purchase prices make bonds and other debt instruments a good investment. Held-to-maturity instruments are not equities since they have no maturity date.

Corporations categorize their investments in debt and equity securities for accounting reasons. Besides HTM securities, “held-for-trading” and “available for sale”

A company’s financial statements regard these groups differently for investment value, profits, and losses.

HTM securities are often noncurrent assets with an amortized cost on a company’s financial statements. Amortization is an accounting method that gradually modifies the cost of an asset throughout its lifetime. While the company’s revenue statement shows earned interest income, its accounting accounts do not reflect investment market price movements.

If they mature within a year, HTM securities are considered current assets. Long-term assets are shown on the balance sheet at the amortized cost, which is the initial acquisition cost plus any subsequent charges.

Corporate accounting statements do not reflect transient price movements for held-to-maturity securities. Accounting statements show fair value for both available-for-sale and held-for-trading securities.

Held-to-Maturity Securities: Pros and Cons

HTM securities’ attractiveness depends on whether the buyer can afford to retain them till maturity or whether they need to sell before then.

HTM investments provide predictable returns. The holder may plan, knowing that these regular earnings will continue at the specified rate until maturity, and the money will be repaid.

Due to the set interest rate upon purchase, market interest rates may rise. (This puts the investor at a disadvantage since if rates rise, they receive less than if they invested at the present, higher market rate.)

HTM securities are mostly long-term government or high-credit corporate debt. Investors must recognize the risk of default if the underlying firm files bankruptcy while retaining long-term debt.

Pros

• HTM investments guarantee principal returns on maturity, enabling future planning.
• Low-risk “safe” investments.
• Unchangeable profit interest rate

Cons

• A positive market shift doesn’t affect the fixed return.
• Even a tiny default risk must be addressed.
• Hold-to-maturity securities are long-term investments.

HTM security example

The U.S. government backs the 10-year Treasury note, making it a secure investment for investors.10-year bonds have set returns. As of August 2020, the 10-year bond pays 0.625% and has multiple maturities.

Suppose Apple (AAPL) invests in a $1,000, 10-year bond and holds it until maturity. The annual payment to Apple is 0.625%. Apple will collect $1,000, the bond’s face value, ten years from now. Apple will earn 0.625%, or $6.25, in interest income over the next decade, regardless of interest rate changes.

Conclusion

• Investors buy held-to-maturity (HTM) assets to hold till maturity.
• Most held-to-maturity (HTM) assets are bonds and debt instruments like CDs.
• Held-to-maturity (HTM) securities provide steady income but are not perfect for short-term liquidity needs.