Held-to-maturity (HTM) securities are debt securities that a company has the intent and ability to hold until they mature. These securities are typically issued by the federal government, state and local governments, and government-sponsored enterprises. Companies use HTM securities for interest income because they offer a predictable and secure stream of interest payments.
The interest payments on HTM securities are generally higher than the interest payments on other types of debt securities, such as Treasury bills. This is because HTM securities are considered to be more risky than other types of debt securities.
Companies typically invest in HTM securities with long-term horizons, such as pension funds and insurance companies. This is because these investors are looking for a steady stream of interest income over a long period of time.
However, companies can also use HTM securities for short-term purposes, such as funding working capital needs. This is because HTM securities can be easily sold in the secondary market.
The main risk associated with HTM securities is interest rate risk. This is because the interest payments on these securities are fixed, so they will not increase if interest rates rise. This means that the value of HTM securities will decrease if interest rates rise.
Another risk associated with HTM securities is credit risk. This is the risk that the issuer of the security will not be able to make the interest payments. This is a relatively low risk for securities issued by the federal government, but it is a higher risk for securities issued by state and local governments.
Finally, there is also the risk that the security will not mature on time. This is known as maturity risk. This is a low risk for federal government securities, but it is a higher risk for state and local government securities.
Which of the following will be classified as a held to maturity investment?
According to the Holding to Maturity (HTM) classification, an investment is a held to maturity investment if all of the following criteria are met:
1. The investor has the positive intent and ability to hold the investment until it matures.
2. The investment has a fixed maturity date.
3. The investor has the intent to not sell the investment prior to maturity.
4. The investment is not subject to call risk.
If all of the above criteria are met, then the investment will be classified as a held to maturity investment. What happens when a security matures? When a security matures, the issuer of the security pays back the principal amount to the investors. The interest payments stop at maturity, and the security is redeemed for its face value.
What is the difference between AFS and trading securities?
The main difference between AFS and trading securities is that AFS are securities that are not held for trading purposes, while trading securities are securities that are held for trading purposes.
AFS are classified as available-for-sale securities and are reported on the balance sheet at their fair value, with any changes in fair value recorded in other comprehensive income. Trading securities, on the other hand, are classified as held-for-trading securities and are reported on the balance sheet at their fair value, with any changes in fair value recorded in net income.
When bonds are retired prior to their maturity date?
When a company retires bonds prior to their maturity date, the company records a gain or loss on the transaction. If the market value of the bonds is greater than the par value, the company records a gain. If the market value is less than the par value, the company records a loss.
What is the difference between held to maturity and available for sale? The main difference between held to maturity and available for sale is that held to maturity investments are those that the company intends to keep until they mature, while available for sale investments are those that the company may sell before they mature.
Held to maturity investments are reported on the balance sheet at their amortized cost, while available for sale investments are reported at their fair value.
Held to maturity investments are not subject to mark-to-market accounting, while available for sale investments are. This means that held to maturity investments are not revalued every period, while available for sale investments are.