Held-to-maturity (HTM) securities are debt securities that a company intends to hold until they mature. These could include bonds, debentures, or other types of debt instruments. The key feature of HTM securities is the intent of the company to hold these securities until their maturity date, not to trade them for short-term price gains.
Companies invest in HTM securities for various reasons, including the steady stream of income they can provide (in the form of interest payments), the return of the principal at maturity, and their role in managing the balance between the company’s short-term and long-term assets and liabilities.
From an accounting perspective, HTM securities are recorded at amortized cost on the balance sheet. The amortized cost is the initial acquisition cost, adjusted for the amortization of any discount or premium existing at the time of purchase. The interest income from these securities is recognized in the income statement, and any impairment losses are also recorded when identified.
One thing to note about HTM securities is that frequent selling of these securities may call into question the company’s intent to hold other securities to maturity, which could require reclassification of those securities and potentially impact the company’s financial statements.
HTM securities are distinguished from other types of securities such as trading securities (securities bought and held principally for the purpose of selling them in the near term) and available-for-sale securities (securities that are not classified as either trading securities or held-to-maturity securities).
Example of Held-to-Maturity Securities
Suppose a manufacturing company, ABC Corp., has some excess cash that it won’t need for operations for the next five years. The company’s management decides to invest this cash in a way that earns more than a typical savings account. After reviewing several investment options, they decide to purchase a 5-year corporate bond issued by XYZ Corp., another company.
The bond has a face value of $1 million and offers a 5% annual interest rate (or coupon rate), meaning ABC Corp. will receive $50,000 (5% of $1 million) in interest each year. Furthermore, at the end of the five-year period, XYZ Corp. will pay back the $1 million face value of the bond, which is the amount ABC Corp. initially invested.
ABC Corp. intends to hold this bond until it matures in five years and does not plan to sell it for a short-term gain. Therefore, ABC Corp. classifies this bond as a held-to-maturity security in its accounting records.
On ABC Corp.’s balance sheet, the bond is recorded as a long-term investment at its amortized cost. Any premium or discount at which ABC Corp. purchased the bond would be amortized over the bond’s life, adjusting the carrying amount of the bond on the balance sheet. Each year, the $50,000 in interest earned from the bond is recorded as interest income on the income statement.
By investing in this HTM security, ABC Corp. can earn a higher return on its excess cash, while also planning for the return of its initial investment once the bond matures.