Held-to-Maturity Securities

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  • 0:03 Investment Securities
  • 0:40 Held-to-Maturity Securities
  • 1:37 Trading Securities
  • 2:13 Securities Available for Sale
  • 2:37 Accounting for HTM Securities
  • 4:48 Lesson Summary
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Lesson Transcript
Instructor: Mark Koscinski

Mark has a doctorate from Drew University and teaches accounting classes. He is a writer, editor and has experience in public and private accounting.

In this lesson, you'll learn to recognize held-to-maturity (HTM) securities and their proper accounting methods. We'll also explain the difference between HTM securities and other types of investments as they relate to accounting.

Investment Securities

Accounting for investments can be complicated because investments can be accounted for in several ways. The held-to-maturity (HTM) securities classification is one of three different accounting classifications for investment securities. The other two classifications are trading securities and securities available for sale.

The two most important criteria involved in accounting for investments are the investment type and your intent for the investment. As a result, three different accounting rules could apply. In this lesson, we'll explore the three types of securities and methods for accounting for HTM securities.

Held-to-Maturity Securities

Held-to-maturity securities (HTM) are debt securities that you intend to hold until maturity and that have a specified maturity date. A common example of a debt security is a corporate bond. If you purchase a $10,000 bond with five years remaining until its maturity, you must intend to hold that bond until it matures for it to be considered an HTM security. The reason HTM securities can only be debt securities is that equity investments, unlike stocks or securities, do not have a maturity date. Equity investments, such as common stock of a publicly traded corporation, could remain outstanding theoretically, well, forever. When a bond is held until maturity the bearer receives the full amount of the investment back, or in this case, $10,000. Since the holder does not intend to sell the bond and the bond is held to maturity, there is no risk of a loss due to market fluctuations in the price of the bond.

Trading Securities

If you intend to manage and then sell an investment for a profit, you have a trading security. A trading security is either an equity investment or a debt security that's purchased as a short-term investment, meaning it's typically held less than one year. Trading securities are valued at fair value. Fair value is defined as the price a willing buyer and seller agree upon. The price per share of a common stock traded on a stock market is a good example of fair value. Any adjustment to the carrying value of the trading security is reflected in the profit or loss of your company.

Securities Available for Sale

The third type of investment classification is securities available for sale (AFS), which are equity investments or debt securities that do not qualify to be classified as either HTM securities or trading securities. AFS securities are accounted for at the lower of cost or market with any loss for the decreased value recorded on the balance sheet net of taxes.

Accounting for HTM Securities

There are two allowable methods for accounting for HTM securities. The first is recording the debt security at amortized cost. It's very common for bonds to sell at a premium or a discount to their face value. This is due to changes in interest rates. As interest rates go up, bond prices go down, and vice versa. So, for instance, you would not pay full value for a bond bearing 5% interest if the market interest rate is 7%. The 5% bond would sell at a discount to its face value, fetching a price less than its face value.

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