Held-to-maturity securities are referred to as the securities which are owned and held till the maturity date. The company purchases held-to-maturity securities to enjoy the maturity benefits and enjoy the coupon payments over the life of the investment. Stocks like equity and preferred are not classified as held-to-maturity securities because they do not have a maturity date and certain returns. Stocks are classified as available-for-sale securities which are held for trading purpose, unlike held-to-maturity securities. The held-to-maturity securities are different from the available-for-sale securities, so; the accounting treatment is also different. The held-to-maturity securities are treated as non-current assets because they generally have a maturity period of more than one year. These securities are also amortized as other non-current assets. The income received from these securities is reported in the income statement, but the market fluctuations are not reported in the financial statements. Held-to-maturity securities provide a stable income over the life of the investment, so they are considered to be less volatile such as government bonds.
Suppose ABC Company issued 2,000 bonds of $1,000 each to raise funds for the expansion of business. Every bond is valued at $1,000 with a coupon rate of 5% until the maturity period, ten years. A business entity, Firm A, purchased 1,000 bonds of ABC Company by paying the amount of $1,000 on each bond. So, Firm A invested a total of $1,000,000 ($1,000 x 1000) in ABC Company, on which it will receive 5% interest per annum. Firm A decides to hold the bond till maturity as the ABC Company was doing well in the market. So, the investment of $1,000,000 in ABC Company would be classified as held-to-maturity securities by Firm A. Every year, the entity will receive an income $500,000 ($1,000,000 x 5%) from the held-to-maturity securities. After ten years, Firm A would receive the principal amount of $1,000 per bond.
Advantages and Disadvantages
There are various advantages and disadvantages of held-to-maturity securities.
The advantages are:
Low Risk: The held-to-maturity securities are less risky as they provide a fixed return with a fixed maturity period. The investment is safe as the government generally backs these securities like treasury bonds.
Fixed Return: The return on these securities is already fixed. It implies that the entity will have to suffer because of any unfavorable downturn of the economy. The interest payment, face value, and maturity value are fixed in advance.
Portfolio Diversification: The investor can include these securities in the portfolio for the long-term and classify the securities as low-risk, low-beta securities.
Cons of held-to-maturity securities are:
Illiquid: The investment in held-to-maturity securities is classified as illiquid as the amount is fixed and locked for a fixed period. The entity is not allowed to sell these securities before maturity, which hampers the business in case of liquidity crises.
Ignorance of Market Fluctuations: The business will not be able to gain from the upward valuations of the market as the returns are fixed.
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