Held-to-Maturity (HTM) securities are financial instruments purchased with the intention of holding them until they reach their maturity date. Typically, these are fixed-income securities such as bonds or other debt instruments. The unique characteristic of HTM securities is their fixed maturity date, during which they pay interest periodically and return the principal at the end of the term.
Types of HTM Securities
There are various types of HTM securities that a company might consider including:
- Corporate Bonds: Debt securities issued by corporations.
- Government Bonds: Debt securities issued by national governments.
- Municipal Bonds: Bonds issued by local governments or other municipalities.
Accounting for HTM Securities
When a company designates its investment in a bond as held-to-maturity, specific accounting rules apply:
Initial Recognition
HTM securities are initially recognized at cost, which includes all expenses directly attributable to the acquisition.
Subsequent Measurement
After initial recognition, HTM securities are measured at amortized cost using the effective interest method. This method allocates the interest income over the period of the investment and accounts for any premium or discount on purchase.
Impairment
Impairment considerations arise if there is a significant decline in the market value of the HTM security, indicating that it might not recover its carrying amount.
Example
Suppose a company purchases a 10-year corporate bond with a face value of $1,000,000 at a discount for $950,000. The bond pays a fixed annual interest of 5%. Using the effective interest rate method, the company will periodically recognize interest income and adjust the carrying amount of the bond.
Historical Context and Applicability
HTM securities have been a staple in conservative investment strategies. Historically, they provided a reliable source of income and were less volatile compared to other investment options.
Comparisons and Related Terms
Available-for-Sale (AFS) Securities
Unlike HTM securities, AFS securities are not necessarily intended to be held to maturity. Changes in the fair value of AFS securities are reported in other comprehensive income (OCI) until realized.
Trading Securities
Trading securities are bought primarily for short-term profit and are measured at fair value through profit and loss.
Frequently Asked Questions
What are the main benefits of HTM securities?
HTM securities provide a predictable income stream and are less susceptible to market fluctuations since they are intended to be held until maturity.
Can HTM securities be sold before maturity?
While primarily held until maturity, HTM securities can be sold in rare and specific circumstances without reclassifying other HTM securities to AFS or trading.
References
- International Financial Reporting Standards (IFRS)
- Financial Accounting Standards Board (FASB) guidelines
Summary
Held-to-Maturity (HTM) securities are a fundamental concept in fixed-income investing. They offer a stable investment vehicle meant to be held until maturity, thereby providing predictable returns and limited exposure to market volatility. Proper accounting ensures that these securities are accurately reflected in financial statements, adhering to specific rules and maintaining investor confidence.
