held to maturity securities ! They are securities that the company buys and holds until maturity; they are used to face the risks of fluctuating interest rates arising from securities and also to diversify investment portfolios.
These investments also enable companies and investors to obtain stable income over a long period of time. Government bonds, corporate bonds, and certificates of deposit (CDs) are among the most prominent examples of held to maturity securities.
These investments are recognized in the company’s financial statements as an amortized cost, as amortization refers to an accounting technique that gradually reduces the cost of an asset.
The mechanism of action of held to maturity securities
Companies or investors buy securities or debt securities, such as certificates of deposit or government bonds, that have repayment schedules and a predetermined maturity date, and then the company decides to keep these securities until their maturity date.
It is worth noting that shares cannot be approved as a security held to maturity because they simply do not have a specific maturity date.
Securities held to maturity are recognized as a non-current asset if their maturity period exceeds one year, so that they are considered long-term assets. They are recorded in the balance sheet as an amortized cost, i.e., the initial purchase cost, in addition to any other costs to be incurred on that security until its maturity date.
If the maturity period is one year or less, the securities are recognized as current assets, and they are considered long-term assets.
For example, if an investor decides to invest in government bonds and keep them until their maturity date after 5 years and the price of the bond is about $2,000 and the amount of fixed return that he will get each year equals 0.655%, this means that this investor will get an amount of $6.55 as a fixed return every year during the five years from the life of the bond until its maturity date.
Advantages of held to maturity securities
- It enables investors to forecast the fixed returns that they will receive, allowing them to make long-term plans for their investment status and portfolios.
- Safe and reliable, it is virtually risk-free.
- Interest rates are fixed and will not be affected by market fluctuations.
The disadvantages of held to maturity securities
- Since interest rates on these investments are fixed all the time, it is likely that interest rates will rise in the market, and therefore the investor will not benefit from this rise. Because he would earn less returns than he would have earned if he had made the investment at current prices.
- Although the risk of default in these investments is low, it is not without possibility.
- They may affect the company’s liquidity because they are long-term investments, and the company must keep them until their maturity date.
- Not suitable for those who want to invest in short-term securities.
The difference between held to maturity securities and securities available for sale
- In terms of meaning: Investments or securities held to maturity are referred to as debt instruments that the investor is obligated to hold until maturity. While the securities available for sale are debt securities or shares obtained by the investor with the intention of selling them and achieving profits within a short period of time.
- In terms of recognition in the financial statements, held to maturity securities are recorded at their amortized cost, and any changes affecting their market value are ignored, and the return is fixed and predetermined. As for the securities available for sale, they are recorded within the items of the balance sheet at their fair value, and changes that occur in their market value before being sold are recognized within the items of the income statement.
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