HTM Investments: A Comprehensive Guide To Held-to-Maturity Securities

HTM Investments: A Comprehensive Guide to Held-to-Maturity Securities

Introduction

Held-to-maturity (HTM) investments are a type of fixed-income security that is held by an investor until its maturity date. These investments are typically long-term bonds or notes that are purchased with the intention of holding them until they mature, rather than selling them in the secondary market. HTM investments are considered to be a relatively low-risk investment, as they provide a steady stream of income in the form of interest payments and the return of principal at maturity.

Characteristics of HTM Investments

• Long-term: HTM investments typically have maturities of five years or more.
• Fixed interest rate: The interest rate on HTM investments is fixed at the time of purchase and does not change over the life of the investment.
• Held to maturity: HTM investments are held until they mature, rather than being sold in the secondary market.
• Low risk: HTM investments are considered to be a relatively low-risk investment, as they provide a steady stream of income and the return of principal at maturity.

Benefits of HTM Investments

• Stable income: HTM investments provide a steady stream of income in the form of interest payments.
• Return of principal: At maturity, the investor receives the full principal amount of the investment.
• Low risk: HTM investments are considered to be a relatively low-risk investment, as they are not subject to the volatility of the secondary market.

Risks of HTM Investments

• Interest rate risk: If interest rates rise, the value of HTM investments will decline.
• Inflation risk: If inflation rises, the value of HTM investments will decline.
• Credit risk: If the issuer of the HTM investment defaults, the investor may lose their investment.

HTM Investments vs. Other Fixed-Income Investments

HTM investments are similar to other fixed-income investments, such as bonds and notes. However, there are some key differences between HTM investments and other fixed-income investments.

• Maturity: HTM investments are typically held until they mature, while other fixed-income investments may be sold in the secondary market before they mature.
• Interest rate risk: HTM investments are more sensitive to interest rate risk than other fixed-income investments, as they are held until maturity.
• Liquidity: HTM investments are less liquid than other fixed-income investments, as they are not typically sold in the secondary market.

Who Should Invest in HTM Investments?

HTM investments are suitable for investors who are looking for a relatively low-risk investment that provides a steady stream of income. HTM investments are also suitable for investors who are not comfortable with the volatility of the secondary market.

How to Invest in HTM Investments

HTM investments can be purchased through a broker or directly from the issuer. When purchasing HTM investments, it is important to consider the following factors:

• Maturity date: The maturity date is the date on which the investment will mature and the investor will receive the full principal amount of the investment.
• Interest rate: The interest rate is the rate at which the investment will pay interest.
• Credit rating: The credit rating of the issuer is a measure of the issuer’s ability to repay its debts.
• Fees: There may be fees associated with purchasing HTM investments, such as brokerage fees or transaction fees.

Conclusion

HTM investments are a type of fixed-income security that is held by an investor until its maturity date. These investments are typically long-term bonds or notes that are purchased with the intention of holding them until they mature, rather than selling them in the secondary market. HTM investments are considered to be a relatively low-risk investment, as they provide a steady stream of income in the form of interest payments and the return of principal at maturity.

FAQs About HTM Investments

What are HTM investments?

Held-to-maturity (HTM) investments are debt securities that a company intends to hold until maturity. These investments are typically long-term, fixed-income securities, such as bonds and notes.

Why do companies hold HTM investments?

Companies hold HTM investments for a variety of reasons, including:

• To generate a steady stream of income
• To match the maturity of their liabilities
• To reduce interest rate risk
• To diversify their investment portfolio

What are the accounting rules for HTM investments?

HTM investments are classified as current assets on a company’s balance sheet. However, the unrealized gains or losses on these investments are not recognized in the income statement. Instead, they are recorded in the other comprehensive income (OCI) section of the balance sheet.

What are the risks associated with HTM investments?

The primary risks associated with HTM investments are:

• Interest rate risk: The value of HTM investments can decline if interest rates rise.
• Credit risk: The issuer of an HTM investment may default on its obligation to pay interest or principal.
• Liquidity risk: HTM investments can be difficult to sell before maturity, especially in times of market stress.

How are HTM investments taxed?

The unrealized gains or losses on HTM investments are not taxed until they are realized. When an HTM investment is sold, the gain or loss is recognized in the income statement and is subject to ordinary income tax rates.

What are the alternatives to HTM investments?

There are a number of alternatives to HTM investments, including:

• Trading securities: These are debt securities that a company intends to sell before maturity.
• Available-for-sale securities: These are debt securities that a company may sell before maturity, but does not intend to do so.
• Cash: This is the most liquid asset and has no interest rate risk.

Which type of investment is right for me?

The type of investment that is right for you depends on your individual circumstances and investment goals. If you are looking for a low-risk, steady stream of income, HTM investments may be a good option. However, if you are willing to take on more risk in order to potentially earn a higher return, you may want to consider other types of investments, such as trading securities or available-for-sale securities.

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