What are Held to Maturity Securities?
Held to Maturity Securities are the debt securities acquired with the intent to be held-to-maturity. These financial assets are measured at amortized cost. Held to Maturity financial assets are purchased to be owned until it matures.
This type of security is recorded as an amortized cost on the financial statements of a company and is usually recorded in the form of the debt security with a particular maturity date. For this securities, the temporary price changes are not reported in the corporate accounting statements. But the interest income which is obtained from a held-to-maturity security is mentioned in the income statement.
Please note that amortized cost is equal to the original issue price minus any principal payments, plus any amortized discount or minus any amortized premium, minus any impairment losses. Subsequent changes in market value are ignored.
Classification of Investment Securities
One of the major categories of classification of investments by a corporation in debt or equity securities is held to Maturity Securities. The classification consists of the following categories:
- Held to maturity securities
- Trading securities
- Available for sale securities.
The commonest form of held to maturity securities bonds. We all know that stocks and shares of a company do not have any specific maturity date o they do not come under this securities. This classification of securities is mainly done for accounting purposes as each type of security has its own characteristics and are treated differently regarding changes in held to maturity investment values, related gains, and losses in the books of the company’s financials. These securities are considered a current asset if the maturity date is of one year or less. But if the maturity date is of a longer time period they are considered as long-term assets and are recorded in the balance sheet of a company as the amortized cost. In a stark contrast to this, held to maturity investment held for trade or available for sale come under fair value.
Held to Maturity Securities Example
Suppose an investor decides to buy debt securities such as bonds. Then the investor has two options- either to hold this security until it reaches its maturity date or to sell it at a premium when there is a decline in the interest rate. This debt security is called held-to-maturity if the holder makes a choice of holding it for the entire term till the maturity date. So if the holder purchases a 10 year treasury bond and makes the choice of holding it till it matures in the tenth year then the Treasury bond comes under held-to-maturity.
Jet Blue Held to Maturity Securities Example
Below is the example of Held to Maturity Securities from Jet Blue SEC Filings.
source: Jet Blue SEC Filings
We note that Jet Blue’s Held to Maturity Securities include Treasury Notes and Corporate Bonds. It had a total of $256 million HTM securities.
Advantages of Held to Maturity Securities
The following are the advantages of held to maturity securities:
- The held to maturity securities are very much predictable as they have a predetermined return which is locked at the time of buying and market fluctuations have no impact on the value of held to maturity securities.
- These securities are very safe and have literally no risk attached as they are predictable and predetermined. So even if the market value fluctuates the return will stay the same since the holder is going to hold the bond until maturity.
- The held to maturity investment help the investors in making long-term financial plans as the purchaser already has confirmed details about when they will receive the return and the amount of return they will get on maturity.
Disadvantages of Held to Maturity Securities
The following are the disadvantages of held to maturity securities:
- Investing in these securities is not a good option if the investors plan to liquidate assets in a short time period or for those who prefer investments which give the option of cashing in whenever it is necessary.
- Since held to maturity investment have already determined returns which are fixed so there is no possibility of getting higher returns even if there is a considerable increase in the market and favorable conditions exist in the market.
Difference Between Held-to-Maturity Trading and Available for Sale Securities
- Held to maturity securities are the debt securities i.e. bonds which the holder has the intention and ability to hold until maturity. These are recorded and reported at amortized cost. Subsequent changes in market value are ignored since the return is predetermined.
- Trading securities are debt and equity securities acquired with the intent to profit over the near term. Trading securities are reported on the balance sheet at fair value, and the unrealized gains and losses (changes in market value before the securities are sold) are recognized in the income statement. Unrealized gains and losses are also known as holding period gains and losses. Derivative instruments are considered and treated in the same manner as trading securities.
- Available for sale securities are debt and equity securities that are not expected to be held-to-maturity or traded in the near term. Available for sale securities are reported on the balance sheet at the fair value like trading securities. But any unrealized gains and losses are not recognized in the income statement but are reported in other comprehensive income as a part of shareholders’ equity.
There are several factors on which the positive and negative sides of held to maturity investment depend on. These factors include the fact whether the purchaser decides to hold the held to maturity investment till the maturity date or if they feel that there may be a need to sell or cash in before the particular date.
This has been a guide to what is Held to maturity securities. Here we discuss HTM securities example along with its advantages and disadvantages. We also look at differences between Held to Maturity Securities vs Available for Sale Securities. You may learn more about basic accounting from the following articles –
- Non-Current Assets
- Off-Balance Sheet Financing
- Liquid Assets
- Current Assets
The post Held to Maturity Securities appeared first on Learn Investment Banking: Financial Modeling Training Courses Online.