What Are Held-to-Maturity(HTM) Securities?
Held-to-maturity (HTM)securitiesare 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.
How Held-to-Maturity (HTM) Securities Work
Bonds and other debt vehicles—such as certificates of deposit (CDs)—are the most common form of HTM investments. Bonds and other debt vehicles have determined (or fixed) payment schedules, a fixed maturity date, and they are purchased to be held until they mature. Since stocks do not have a maturity date, they do not qualify as held-to-maturity securities.
For accounting purposes, corporations use different categories to classify their investments in debt and equity securities. In addition to HTM securities, other classifications include "held-for-trading" and "available for sale."
On a company's financial statements, these different categories are treated differently in terms of their investment value, as well as related gains and losses.
Key Takeaways
- Held-to-maturity (HTM)securitiesare purchased to be owned until maturity.
- Bonds and other debt vehicles—such as certificates of deposit (CDs)—are the most common form of held-to-maturity (HTM) investments.
- Held-to-maturity (HTM) securities provide investors with a consistent stream of income; however, they are not ideal if an investor anticipates needing cash in the short-term.
HTM securities are typically reportedas a noncurrent asset; they have an amortized coston a company'sfinancial statements. Amortization is an accounting practice that adjusts the cost of the asset incrementally throughout its life. Earned interest income appears on the company's income statement, but changes in the market price of the investment do not change on the firm's accounting statements.
HTM securities are only reported as current assets if they have a maturity date of one year or less. Securities with maturities over one year are stated as long-term assets and appear on the balance sheet at the amortized cost—meaning the initial acquisition cost, plus any additional costs incurred to date.
Unlike held-for-trading securities, temporary price changes for held-to-maturity securities do not appear in corporate accounting statements. Both available for sale and held-for-trading securities appear as fair value on accounting statements.
Advantages and Disadvantages of Held-to-Maturity (HTM) Securities
The appeal of HTM securities depends on several factors, including whether or not the purchaser can afford to hold the investment until it matures—or if there might be an anticipated need to sell before that time.
The investor has the predictability of regular returns from HTM investments. These regular earnings allow the holder to make plans for the future, knowing this income will continue at the set rate, until the final return of capital upon maturity.
Since the interest rate received is fixed at the date of purchase, it's possible that the market interest rates will increase. (This would leave the investor at a relative disadvantage in this scenario because if the rates go up, the investor is earning less than if 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. However, investors must understand 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.
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. 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.
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.
FAQs
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.
What is an example of a held to maturity security? ›
A common example of a debt security is a corporate bond. If you purchase a $10,000 bond with five years remaining until its maturity, you must intend to hold that bond until it matures for it to be considered an HTM security.
What is an example of HTM securities? ›
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.
Can HTM securities be sold before maturity? ›
Held to maturity securities bite into the company's liquidity. Since companies make the commitment to hold these securities until maturity, they cannot really count on these securities to be sold if cash is needed in the short term.
What happens if a bank sells HTM securities? ›
Bonds the banks plan to sell need to be classified as available-for-sale securities and accounted for at fair market value. If banks sell any HTM securities, they must reclassify all of their HTM securities as available for sale and potentially take a big loss on the securities they didn't sell.
Why do banks have held to maturity securities? ›
To avoid recognizing future unrealized losses, many banks transferred available-for-sale (AFS) securities— which under GAAP are recognized at fair value with unrealized gains and losses recorded in accumulated other comprehensive income (AOCI), a component of owners' equity—to held-to-maturity (HTM) securities, which ...
What happens when a security matures? ›
When the security reaches its full term, we say it has matured. When a security that you own matures, you can either: get the money (redeem it), or. sometimes reinvest the money in another security of the same type.
What is HTM hold till maturity? ›
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.
Can you sell HTM securities early? ›
In addition, under ASC 320-10-25-14, a sale of a held-to-maturity security would not taint the remaining portfolio if the security is sold close to its maturity date (e.g., three months or less). This is permitted because changes in market interest rates would not significantly impact the security's fair value.
What is the HTM investment strategy? ›
Investors in HTM securities typically adopt a buy-and-hold strategy. This approach means they intend to hold the security until it matures, reaping the benefits of stable interest income over the life of the investment.
Investment securities are designated on the balance sheet as either “held to maturity” (HTM) or “available for sale” (AFS). As the name suggests, HTM securities are those the bank does not intend to sell but instead expects to hold until they fully mature.
Can banks sell HTM? ›
That sell-off raised concerns: Banks aren't supposed to sell HTM investments for quick cash, but would SVB be forced to “taint” its portfolio by doing so? If that happened, any losses in the fair value of those securities would come to light.
What is the HTM limit for banks? ›
The RBI raised the cap on securities that can be included in the HTM category from 22% to 23% in April 2022. The central bank had stated at the time that the HTM limit would be gradually decreased from April to June of 2023 to 19.5% of net demand and time liabilities, which serves as a stand-in for deposits.
Why do banks have HTM? ›
Held-to-Maturity (HTM) accounting allows banks to avoid using current market prices to value securities on their balance sheet.
What are unrealized losses on HTM? ›
Note: For HTM securities, unrealized losses are proxied as the difference between amortized value and fair value. Unrealized gains and losses on HTM securities are excluded from regulatory capital under the proposal, however, as they are never likely to be realized (because banks do not intend to sell them).
Can you move htm to afs? ›
However, if a financial institution moves a security out of HTM, they cannot use the HTM designation for at least two years and instead must use the AFS category and will have to mark to market interest rate volatility through equity.
What is an example of maturity in banking? ›
For example, if a company issues a $10,000 bond that pays a 3% annual coupon and the bond matures in five years, the bondholder will receive $300 each year, or $1,500 over the life of the bond. The principal amount of $10,000 will be returned at the end of five years. The bond has a maturity value of $11,500.
When should a debt security be classified as held to maturity? ›
Held-to-Maturity debt securities are securities that are purchased with the intent and ability to be held until maturity. An insurance company electing the Held-to-Maturity classification must hold the securities to full term.
Are Treasury bills held to maturity securities? ›
Treasury bills (or T-bills) are U.S. debt securities that mature over a time period of four weeks to one year. The most common terms for T-bills are for four, eight, 13, 17, 26 and 52 weeks. Treasury bills can be bought directly from the government at TreasuryDirect.gov or through a brokerage account.
What does maturity of security mean? ›
The term “security maturity” refers to an organization's security position relative to its risk environment and tolerances. The risk scenarios will vary greatly according to the organizational environment, as each organization has its own security risk culture.
