What are Held-to-Maturity Securities?

A held-to-maturity security is a type of debt security that a company or individual intends to hold until its maturity date, rather than selling it before then. These securities are typically purchased for their fixed income and are recorded at amortized cost on the balance sheet, rather than at market value. The key characteristics of held-to-maturity securities are as follows:

Intent and ability to hold until maturity. The holder must have the intent and the financial ability to hold the security until it matures.
Valuation. The security is initially recorded at its purchase cost and is subsequently carried at its amortized cost.
Accounting. Unrealized gains or losses due to market value changes are not recognized in the financial statements while a security is classified as held-to-maturity. Periodic interest income is recognized in the income statement.

Examples of Held-to-Maturity Securities

The most common held-to-maturity securities are bonds and other debt securities. Common stock and preferred stock are not classified as held-to-maturity securities, since they have no maturity dates, and so cannot be held to maturity.

Restrictions on Use of the Held-to-Maturity Classification

An entity cannot classify any financial assets as held to maturity if it has sold or reclassified more than an insignificant amount of held-to-maturity investments before maturity during the current fiscal year or the two preceding years. In essence, the assumption is that such an organization is incapable of holding an investment to its maturity date. This restriction does not include reclassifications that were so close to maturity or the asset's call date that changes in the market interest rate would not have significantly impacted the asset's fair value, or those for which the entity had already collected substantially all of the original principal, or those caused by an isolated event beyond the entity's control.

Are Held-to-Maturity Investments Adjusted to Fair Value?

The cost of a held to maturity investment is not adjusted to fair value during the holding period; there is no point in doing so, since (as the name implies) the holder intends to retain ownership until the maturity date of the investment, at which point the face value of the investment will be redeemed.