Held-to-maturity (HTM) securities represent a key component in the landscape of investing, particularly for individuals and institutions looking for stability and predictability in their investment portfolios. This article provides a comprehensive review of HTM securities, their functions, advantages, disadvantages, and how they are reported in financial statements.
What Are Held-to-Maturity (HTM) Securities?
Held-to-maturity securities are any financial instruments that an investor commits to hold until they reach maturity. This generally includes bonds and other debt vehicles, such as certificates of deposit (CDs), which have predetermined payment schedules and fixed maturity dates. Because stocks do not have a defined maturity date, they do not qualify as HTM securities.
Key Takeaways
- HTM securities are invested in with the intent of holding them to their maturity date.
- Common types include government and corporate bonds, and certificates of deposit (CDs).
- HTM securities offer a regular income stream but are not suitable for investors who may need liquidity in the short term.
How Held-to-Maturity (HTM) Securities Work
HTM securities generally have a fixed payment schedule and a fixed maturity date. They are classified under the accounting framework based on their investment orientation:
- Held-for-Trading: Securities that are intended for sale in the short term.
- Available-for-Sale: Securities that can be sold before maturity, but are not specifically intended for trading.
On a company’s financial statements, HTM securities are categorized differently than trading or available-for-sale securities. They are reported as long-term or noncurrent assets on the balance sheet at their amortized cost, which realistically represents the initial cost plus any additional costs incurred over time.
Accounting Implications
- HTM securities are only classified as current assets if they are set to mature in one year or less.
- The earned interest income from HTM investments appears on the company’s income statement; however, fluctuations in market prices do not impact the accounting statements regarding these securities.
The Appeal of HTM Securities
Investors choose HTM securities for several reasons:
Advantages
- Predictable Income: HTM securities provide a fixed rate of return, enabling better future financial planning.
- Security: Primarily long-term government or high-credit-rated corporate debt is considered safe investments, minimally affected by market volatility.
- Fixed Interest Rates: Once the interest rate is set, it remains unchanged, which can be beneficial in a declining interest rate environment.
Disadvantages
- Lack of Liquidity: These securities are not designed for investors who anticipate needing cash before maturity.
- Opportunity Cost: If market rates increase, HTM investors may miss out on higher returns compared to new investments available at market rates.
- Default Risk: Although low for government securities, the risk of an issuer default remains a concern, especially for corporate debt.
Examples of HTM Securities
A prime example of an HTM security is a U.S. Treasury note. Backed by the U.S. government, investors consider these notes extremely safe. For instance, in May 2024, a 10-year U.S. Treasury note provides a 4.5% annual return. If a company like Apple (AAPL) invests in a $1,000, decade-long bond, they will secure a consistent interest income of $45 annually and will receive the face value of $1,000 upon maturity.
Common Types of HTM Securities
- Government Bonds: U.S. Treasury bonds, notes, and bills
- Corporate Bonds: High-rated corporate debt
- Certificates of Deposit (CDs): Offered by banks with specific maturities
Reporting HTM Securities on Financial Statements
On a company's balance sheet, HTM securities are presented at their amortized cost. This categorization ensures clarity regarding the long-term value of these assets. It is important for investors to understand that fluctuating market conditions do not impact the reported value of HTM securities on financial statements.
Summary of Reporting:
- Noncurrent Assets: HTM securities with maturities over one year.
- Current Assets: HTM securities with maturities of one year or less.
The Bottom Line
Held-to-maturity (HTM) securities present unique opportunities and challenges for investors. They are ideal for those seeking a stable income and are committed to holding the investment to maturity. However, potential investors should carefully assess their own financial needs and market conditions before investing in these securities, as the fixed nature of HTM investments does not accommodate the liquidity needs or the opportunity to capitalize on fluctuating rates. Understanding the risks and rewards of HTM securities can be instrumental in crafting a diversified and balanced investment portfolio.