Key Takeaways
- Debt held until maturity at amortized cost.
- Interest income recorded; ignores market fluctuations.
- Requires intent and ability to hold long-term.
- Early sale risks reclassification and accounting issues.
What is Held-to-Maturity (HTM)?
Held-to-Maturity (HTM) securities are debt instruments that investors purchase with the intent and capability to keep until they mature. These securities, such as bonds, are recorded at amortized cost rather than current market value, following GAAP standards to reduce volatility from short-term price changes.
This classification provides stability on your balance sheet, making HTM a preferred choice for conservative portfolio management.
Key Characteristics
HTM securities are defined by specific traits that distinguish them from other debt investments.
- Intent and Ability: You must have the positive intent and financial resources to hold the securities until maturity.
- Fixed Maturity Date: These instruments have a predetermined date when the principal is repaid.
- Amortized Cost Valuation: Recorded at cost adjusted for premiums or discounts, not fair market value fluctuations.
- Interest Income: Periodic coupon payments provide steady income, recognized on the income statement.
- Examples: Typical HTM securities include government bonds, corporate bonds, and fixed-income ETFs like BND.
How It Works
When you purchase an HTM security, it is initially recorded at its purchase price, which may differ from its face value. Over time, any premium or discount is amortized, adjusting the carrying value on the balance sheet.
Coupon payments are recognized as interest income, contributing to predictable cash flows. Market fluctuations do not affect the recorded value, which helps in strategies like portfolio immunization against interest rate risk. At maturity, the issuer returns the principal, completing the investment cycle.
Examples and Use Cases
HTM securities suit investors seeking stability and predictable returns over the long term. Here are common examples:
- Airlines: Companies like Delta and American Airlines often hold HTM bonds to manage their debt and financing costs.
- Bond ETFs: Funds such as BND may contain HTM securities to provide diversified fixed income exposure.
- Index Funds: Conservative investors might combine HTM bonds with options like low-cost index funds for balanced portfolios.
Important Considerations
While HTM securities offer predictable income and balance sheet stability, they come with liquidity constraints since selling before maturity can require reclassification under accounting rules. This reclassification may impact your financial statements and compliance with GAAP.
Additionally, holding HTM securities exposes you to credit risk if the issuer defaults, and reinvestment risk if interest rates rise. Balancing HTM holdings with other investments, such as those discussed in best bond ETFs, can help manage these risks effectively.
Final Words
Held-to-Maturity securities offer stability by locking in income and avoiding market volatility on your balance sheet. Review your financial goals and liquidity needs to determine if committing to HTM investments aligns with your portfolio strategy.
Frequently Asked Questions
Held-to-Maturity (HTM) securities are debt instruments like bonds that a company intends and is able to hold until they mature. They are recorded on the balance sheet at amortized cost, providing stability against short-term market fluctuations.
HTM securities typically include government bonds, corporate bonds, and other fixed-income debt with fixed maturity dates and periodic interest payments. These securities are chosen for long-term holding rather than short-term trading.
HTM securities are recorded at amortized cost, which spreads any premium or discount over the life of the security. Interest income from periodic coupon payments is recognized on the income statement, while market value changes are ignored until maturity or sale.
Selling an HTM security before maturity can require reclassifying the entire HTM portfolio, which may impact financial reporting. This is because the HTM classification relies on the intent and ability to hold securities until maturity.
HTM securities help companies manage interest rate risk and generate predictable, low-risk income by shielding reported values from market volatility. However, they offer limited liquidity since the securities are intended to be held long-term.
Amortized cost is the original purchase price of the HTM security adjusted over time to spread any premium or discount evenly across its life. This method ensures the carrying value reflects the cost basis rather than fluctuating market prices.
Interest income from HTM securities is recorded periodically on the income statement based on the coupon rate and face value. For example, a bond with a 5% coupon on $100,000 face value pays $5,000 annually, which is recognized as income.
