What do Held-to-Maturity Securities Mean?

Held-to-Maturity (HTM) securities are debt investments purchased with the intent to hold them until they mature, rather than selling them for short-term profit. These are like fixed-income investments, which pay periodic interest and return the principal amount at maturity. Some securities held to maturity are bonds and other debt instruments. HTMs are recorded at amortized cost, rather than the current market value. It means their value is adjusted for any purchase premiums or discounts.

How Does Held-to-Maturity (HTM) Securities Work?

Some popular HTM investment types are bonds and other debt instruments, such as certificates of deposit. Since stocks don't have a maturity date, they are not considered held-to-maturity securities. However, bonds and other debt instruments have fixed payment schedules and maturation dates. Also, they are purchased with the intent to hold until they mature.

Apart from HTM securities, other classifications include 'held-for-trading' and 'available for sale'. Corporations categorize their stock and debt holdings into different divisions for accounting purposes.

What are the Advantages and Disadvantages of HTM Securities?

Here are some advantages and disadvantages of HTM securities:

Advantages of Held-to-Maturity Securities

The following are some advantages of HTM securities:

• Holding securities untill maturity usually carries less risk.
• If the bond issuer doesn't default, returns are guaranteed.
• HTM securities offer a steady source of income to the investors.
• The interest income earned from government HTMs is generally exempt from local or state income taxes in certain jurisdictions. 

Disadvantages of Held-to-Maturity Securities

The following are some disadvantages of HTM securities:

• Securities held to maturity impact the company's liquidity. It is because if quick cash is needed, businesses cannot rely on them to be sold.
• These securities offer downside protection by fixing the returns in advance. It means that while your capital is secure, your returns are capped even if the overall market expereince significant growth.

What is an Example of HTM Securities?

If a company decides to buy a bond of $10,000 with a 10-year maturity and a 4% annual interest rate. They decide to hold it until maturity so the bond will be classified as an HTM security. Hence,

• Each year, the company receives an interest income of $400.
• The bond is recorded at its initial purchase cost of $10,000.
• It will be adjusted for any amortization, instead of its market value, which might fluctuate.