Held-to-Maturity Securities

Held-to-maturity (HTM) securities are investments in debt securities, such as government bonds, corporate bonds and mortgage-backed securities, that a company has both the positive intent and the ability to hold until they mature. Under US GAAP (ASC 320), they are one of three categories of debt investments, alongside trading securities and available-for-sale securities. The defining feature of the HTM category is that the investments are carried at amortized cost on the balance sheet, not at market value, so day-to-day price movements caused by changes in interest rates do not affect reported earnings or equity.

The logic is that if a company is genuinely going to hold a bond until it repays its face value, interim swings in the bond's price will never be realized. HTM accounting is used heavily by banks and insurers, which hold large portfolios of securities to match long-term liabilities.

Only debt securities qualify; equity securities have no maturity date. The holder must intend to keep the security to maturity and have the financial ability to do so, meaning it should not expect to need to sell it to meet liquidity needs. A company cannot classify a security as HTM if it might sell it in response to changes in interest rates, prepayment risk, funding needs or foreign exchange risk. Securities that can be prepaid in a way that would prevent the holder from recovering substantially all of its investment are also excluded.

HTM securities are recorded at cost when bought. Any premium or discount relative to face value is then amortized over the life of the security using the effective interest method, so that interest income reflects the yield at purchase.

For example, a company buys a $100,000 face value bond paying 5 percent annual interest, in two semiannual payments, for $96,000, a price that gives a yield of 6 percent a year. In the first six months it receives $2,500 of cash interest, but it records interest income of $96,000 times 3 percent, or $2,880. The $380 difference is discount amortization, which increases the bond's carrying amount to $96,380. In the next period interest income is about $2,891 and the carrying amount rises to about $96,771. By maturity, the carrying amount has risen to $100,000, the amount repaid. Premiums are handled in the same way but reduce the carrying amount, as explained in the entry on amortization of bond premium.

Fair values must still be disclosed in the notes. Since the adoption of ASC 326, the current expected credit loss model, companies must also record an allowance for expected credit losses on HTM securities, though for US Treasury securities the expected loss is often judged to be zero.

If a company sells or transfers HTM securities before maturity, other than in a few narrow circumstances such as a significant deterioration in the issuer's credit or a major change in tax law, it calls its intent into question. Such a sale can "taint" the whole HTM portfolio, forcing the company to reclassify all remaining HTM securities to available-for-sale and measure them at fair value, and usually preventing it from using the category for a period.

Because HTM securities are not marked to market, large unrealized losses can build up without appearing in earnings or regulatory capital measures. When interest rates rose sharply in 2022, many banks held long-dated HTM bonds bought at very low yields that had lost substantial value. Silicon Valley Bank, which failed in March 2023, had disclosed unrealized losses on its HTM portfolio of more than $15 billion at the end of 2022, comparable to its total equity. When depositors withdrew funds, the bank's ability to hold its bonds to maturity was undermined. The episode renewed debate about whether amortized cost hides interest rate risk; the issue is discussed further in the entry on unrealized losses in securities portfolios.

Under IFRS 9, there is no HTM label. Instead, debt instruments are measured at amortized cost if they are held within a business model whose objective is to collect contractual cash flows and those cash flows are solely payments of principal and interest. The practical result is similar, although IFRS does not apply the US tainting rule in the same form. Investors comparing banks should look at disclosed fair values and the yield to maturity of these portfolios.