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 and 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 htm securities are typically reported as a noncurrent asset they have an amortized cost on a company s financial 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 htm securitiesthe 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 htm investments allow for future planning with the assurance of their principal return on maturity they re considered safe investments with little to no risk the interest rate of earnings is locked in and will not change the fixed return is predetermined 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 rather they are meant to be held to term example of an htm securitythe 10 year u s treasury note is backed by the u s government and is one of the safest investments for investors 1 the 10 year bond pays a fixed rate of return for example as of may 2024 the 10 year bond pays around 4 5 and comes in various maturities 2let 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 4 5 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 4 5 or 45 each year in interest income 