Updated July 29, 2023
Introduction to Held to Maturity Security
Held to Maturity (HTM) securities are those which are purchased and owned until the maturity of the instrument. The most common form of HTM is bonded as they have a maturity date.
The most common form of these securities consists of bonds and this article will include an emphasis on bonds. Common stock/shares are not considered within this category as they do not have maturity and can be held until the life of the company issuing the shares. Held to Maturity securities are reported as current assets with a maturity of one year or less.
If the maturity is of a longer duration, they are reported as long-term assets and shown on the balance sheet at the amortized costs (Acquisition cost and any additional costs to date). In contrast, investments that are either held for trade or available for sale are listed at fair value. Many established financial institutions have diversified a portion of their portfolios in the HTM sector especially post the implementation of Basel III.
Pros and Cons
They are several factors and investment objectives which depend on the functionality of such securities which also highlights their benefits and drawbacks.
Pros
- Such securities are considered relatively ‘safe’ investments with minimum or no risks involved. One instance can be of Government bonds which do offer fewer returns but it indicates guaranteed return and also the safety of the investments made depending on the economic situation of the country.
- Held to Maturity securities have a relatively predictable and pre-determined return which is locked at the time of purchase. This makes them resilient against fluctuations in the market.
- Investors can consider long-term financial plans on the basis of these Held to Maturity securities as the purchaser has accurate details about how much return will they extract and at what point of time.
- Reclassification of securities in a portfolio to Held to Maturity can offer stable ratios to the overall profitability.
Cons
- These securities are not a feasible option for investors who require liquidation opportunities in the short term.
- It’s not advisable for active traders or those who prefer cashing their investments according to their convenience.
- Since the level of returns is fixed and pre-determined, there is no probability of substantially high returns if the market is going through a bullish phase.
Held to Maturity Security Examples
Let’s assume on Jan 1, 2014, XYZ Ltd. purchased 1 million bonds worth $100 of KL Ltd. carrying annual coupons @ 7% with a maturity of 20 years for $93.57 million. These bonds have an effective rate of interest @ 8%.
XYZ Ltd. has the intention to hold these bonds till maturity so they are classified as Held to maturity (HTM) and the acquisition is recorded as below:
| Investment in Bonds of KL. Ltd |
100 million |
|
| Cash | 93.57 million | |
| Discount on Bonds | 6.43 million |
These bonds will be reported on the balance sheet at $93.57 million ($100 million face value less $6.43 million discount on bonds)
For the year ended 31st December 2014 the interest income on the bonds would be equal to the product of the bonds’ carrying amount and effective interest rates which = $7.49 million [$93.57mm * 8%]
Interest receivable for the time period = $7mm [contractual coupon rate of 7% applicable on the face value of bonds worth $100mm]. The difference between interest receivable and interest income is the amortization of discount and the interest income is realized as:
| Interest Receivable | 7 million | |
| Discount on Bonds | 0.49 million | |
| Interest Income | 7.49 million |
On December 31st, 2014, the bonds will be shown at $94.06mm ($93.57 mm plus $0.49mm). The discount on the bonds recognized upon the acquisition of the bonds will expire over the life on the bonds i.e. 20 years in this case.
In a nutshell, the various accounting treatment for different securities are:
| Class of Securities | Types of Securities | Disclosure on the Balance Sheet | Treatment of Temporary changes in the value |
| Held to Maturity (HTM) | Debt | Amortized Cost | Not Recognized |
| Available for Sale (AFS) | Debt & Equity | Fair Market Value (FMV) | Reported in the Stockholders Equity |
| Trading | Debt & Equity | Fair Market Value (FMV) | Reported on the Income Statement |
| Equity Method | Equity | Historical cost adjusted for changes in the net assets of the investee. | Not Recognized |
The reason for the various treatment of accounting reflects the various purposes for which securities are held. Neither equity-method securities nor securities held to maturity are held to be sold, making changes in the fair value less relevant.
Trading securities and available-for-sale securities are intended to be sold if their price rises high enough which makes the FMV very important to the users of the financial statements. However, available-for-sale securities, are not expected to be sold in the current accounting period, which consequently makes the unrealized gains or losses reported through Accumulated Other Comprehensive Income (AOCI) recorded in the section of Stockholders’ Equity within the balance sheet instead of diverting into Retained Earnings of the income statement.
Conclusion-Held to Maturity Security Examples
It should be observed that though the Held to Maturity securities offer multiple accounting benefits to financial institutions, it substantially reduces liquidity within the bond portfolio. A later sale of the bond is precluded unless other similar issues are also reverted from HTM to AFS. On a regular basis, the sale of these securities can raise concerns with external accountants and examiners.
Banks and portfolio managers should consider options of Held to Maturity securities as they offer guaranteed returns and limited risks. Financial advice must be taken before assessing the impact on the portfolio. This shall require a holistic look at the balance sheet and an understanding of future liquidity needs. Specific strategies will also vary depending on the specifications of the portfolio but typically institutions look to reclassify less liquid securities and holdings which are sensitive to an interest rate increase. It is advisable to have a blend of AFS and HTM securities in a portfolio making it relatively robust under various situations.
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