What Are Held-to-Maturity (HTM) Securities?
Held-to-Maturity (HTM) securities are debt investments such as bonds and certificates of deposit (CDs) that a company or investor intends to hold until their specified maturity date. Unlike other securities that might be sold for a variety of reasons, HTM securities are earmarked from the outset for this long-term purpose.
Accounting for Held-to-Maturity Securities
For accounting pijazz, HTM securities bring a stability ball to the financial playground. They sit as noncurrent (or long-term) assets on the balance sheet unless they are maturing within the year. At this point, they gracefully transition into the current assets category. The unique feature of these securities lies in their calculation: they are accounted for at the amortized cost, not the market value. This method calculates the cost of the security plus any incurred costs, adjusted periodically for amortization.
Since HTM securities are destined to stick around until their maturity date, any in-between flirtations with market price fluctuations are ignored on the company’s financial statements. They bring consistency without the drama, unlike their counterparts in the “held-for-trading” or “available-for-sale” categories, which reflect market variations more acutely.
Advantages and Disadvantages of HTM Securities
Prospective Champagne Toasts:
- Predictability: Slide into your financial future with the smooth predictability of HTM securities, knowing exactly what income to expect and when.
- Security Blanket: Generally considered safe investments, especially if they’re bonds from government or stalwart corporations.
- Interest Rate Lockdown: The interest rate set at the time of purchase remains constant, providing immunity against future rate decreases.
Potential Party Poopers:
- Interest Rate Envy: Should interest rates climb, HTM investors will be spectating from the sidelines, missing out on potentially higher returns.
- Financial Flexibility: If the need arises to access funds prior to maturity, selling HTM securities can be cumbersome and potentially costly.
- Default Dread: There’s a slim but real ghost story about the risk of default; if the issuer goes belly-up, so might your investment.
Related Terms
- Amortized Cost: The adjusted cost of an HTM security, calculated by gradually writing off its premium or discount over its life.
- Certificates of Deposit (CDs): A time-bound deposit offered by banks with fixed interest rates, often used as HTM investments.
- Debt Instruments: Any tradable asset representing a loan made by an investor to a borrower.
Book Recommendations for Further Learning
- “The Bond Book” by Annette Thau - A comprehensive guide that offers deep dives into different types of bonds, including HTM securities.
- “Investment Analysis and Portfolio Management” by Frank K. Reilly and Keith C. Brown - This book explores various asset classes and investment strategies, providing a robust framework for managing a portfolio that includes HTM investments.
HTM securities might not be the rock stars of the investment world, but they sure are the reliable roadies, ensuring a smooth ride through the turbulences of financial markets. Decode their charms and challenges to decide if they deserve a spot in your investment lineup!
