Definition
Held-to-maturity (HTM) is a classification of debt securities in the accounting field. It refers to investments that a company intends and has the ability to hold until they mature or come due. The investment’s value is based on amortized cost, rather than its current market price.
Phonetic
“Held-to-Maturity” in phonetics is pronounced as: “held – too – muh-choo-ri-tee” And “HTM” letter by letter would be: “aych – tee – em”
Key Takeaways
Sure, here are the three main takeaways about Held-to-Maturity (HTM) in html numbered format:“`html
- Held-to-Maturity (HTM) refers to a long-term financial strategy in which a company holds onto a security or investment until it matures. Unlike some other investment strategies, the focus of HTM is more on income generation over time rather than immediate resale and profit.
- Under this strategy, businesses can categorize any debt securities that they plan to hold until maturity as HTM in their accounting records. This allows the company to record the investment at the original cost, adjusted for any amortization or impairment charges, rather than its current market value.
- HTM securities can provide companies with a certain degree of stability in their portfolio. As they can be recorded at their original price rather than market value, changes in the market don’t have as much of an impact on their financial reporting. However, this category has strict regulations. If a company decides to sell or reclassify more than a small percentage of their HTM securities, they can lose the ability to classify future purchases as HTM.
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Importance
The business/finance term Held-to-Maturity (HTM) is significant because it refers to a specific accounting standard for bonds and other debt securities. When a company buys these instruments with the intent to keep them in the portfolio until they reach their maturity date, they record them as HTM. This classification allows companies to avoid potential short-term volatility in their financials which may arise from changes in market value. Instead, the HTM securities are reported on the balance sheet at amortized cost, not market value. This strategy provides the holder with a reliable return via their fixed interest payments, ensuring predictable income and cash flow. Notably, the use of the HTM category has implications for financial reporting and risk management within an organization.
Explanation
The primary purpose of the held-to-maturity (HTM) classification is to provide companies with a means to avoid short-term volatility on the balance sheet. Assets that are classified as held-to-maturity, such as bonds or other types of debt securities, are ones the company intends to keep until they fully mature. This means that even if the market value of these securities rises or falls in the short-term, the company does not record these changes on its financial statements. Essentially, the value of these assets on the company’s books remains constant, barring any impairment, until the security matures or is sold.The HTM classification is primarily used for long-term debt securities, where the company has not only the intent but also the capacity to hold these securities until maturity. This allows the company to earn steady income over time through interest payments, irrespective of short-term market fluctuations. It gives the company strategic control to meet its long-term financial goals without being influenced by temporary market changes. It also aids in providing a clearer picture of long-term investments, which helps in financial analysis, forecasting and strategic planning.
Examples
1. Bonds: If a company buys bonds with the plan to hold them until they mature, it would classify them as HTM investments. This means that the company does not intend to sell these securities before their maturity date. The motivation behind holding until maturity could vary, such as a reliable interest income stream, or a strategic long-term investment plan. 2. Government Securities: A local government may issue securities (e.g., municipal bonds) with the explicit intention of funding a specific public project, like a new highway construction or a school renovation. If an investor purchases these securities and intends to hold onto them until their maturity date for a steady return or support the project, these are considered HTM investments.3. Certificates of Deposit (CDs): A person might purchase a Certificate of Deposit (CD) from their bank with the intent of holding it until its maturity date. This would also be considered as an HTM investment. The individual is guaranteed to receive the initial amount they invested along with accrued interest when the CD matures, demonstrating a low-risk way to earn interest over time.
Frequently Asked Questions(FAQ)
What does Held-to-Maturity (HTM) mean in finance and business?
Held-to-Maturity is a term used in accounting and finance to categorize certain types of financial securities. These are securities that a company intends to hold until they mature, meaning until the financial obligation is fulfilled by the entity that issued the security.
What types of securities are usually categorized as Held-to-Maturity?
Typically, debt securities such as bonds or notes that have a maturity date are categorized by companies as held-to-maturity if the company plans on keeping them until that date arrives.
How are Held-to-Maturity securities treated in terms of accounting?
Held-to-Maturity securities are reported on the balance sheet at their amortized cost, not their current market value.
Can companies sell their Held-to-Maturity securities?
Yes, companies can technically sell securities categorized as Held-to-Maturity before their maturity date. However, if they do this often, auditors may require them to reclassify these securities, which could impact financial statements.
How does HTM compare to other categories of securities, such as Trading and Available-for-Sale securities?
Unlike Held-to-Maturity securities which are usually kept until maturity, Trading securities are purchased with the intent to sell them in the short term. Available-for-Sale securities are those that don’t fit into either category and could be sold, but aren’t necessarily expected to be.
What are the potential advantages of holding securities to maturity?
The advantage is often a chance for the investor to gain a definite return on their investment, assuming the issuer does not default. This can be beneficial in times of market decline or volatility, as fluctuations in market value won’t affect the return realized at maturity.
What happens if a company frequently sells securities classified as Held-to-Maturity?
If a company frequently sells securities classified as Held-to-Maturity, it could be forced to reclassify its securities. This action may subject the portfolio to different accounting treatments which can potentially impact financial statements.
Related Finance Terms
- Amortized Cost
- Investment Maturity Date
- Long-Term Investment
- Fixed Income Security
- Impairment Loss
