Held-to-maturity

(adjective)

any security that an investor intends to retain until its term expires

Related Terms

Examples of Held-to-maturity in the following topics:

  • Amortized Cost Method

    • Debt held to maturity is shown on the balance sheet at the amortized acquisition cost.
    • The definition of a debt is held-to-maturity is a debt which the company has both the ability and intent to hold until maturity.
    • All changes in market value are ignored for debt held to maturity.
    • Debt held to maturity is shown on the balance sheet at the amortized acquisition cost.
    • Explain how a company would apply the amortized cost method to a debt held to maturity

  • Accounting for Interest Earned and Principal at Maturity

    • At maturity, firms should debit cash and credit held to maturity investments the balance of the principal payment.
    • The issuer has to repay the nominal amount on the maturity date (which can be any length of time).
    • During the life of the debt held to maturity, the company holding the debt will record the interest received at the designated payment dates.
    • Remember the original entry debited the held to maturity investment account and credit cash.
    • Summarize the journal entry required to record a debt held to maturity

  • Accounting Methodologies: Amortized Cost, Fair Value, and Equity

    • Due to different durations of holding and other factors, companies use several accounting methodologies, including amortized cost, fair value, and equity.
    • If a business holds debt securities to maturity with the intent to sell are classified as held-to-maturity securities.
    • Held to maturity securities are reported at amortized cost less impairment.
    • Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities.
    • Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities.

  • Accounting for Sale of Debt

    • How debt sales are recorded depends on whether the debt is classified as "held-to-maturity," "a trading security," or "available-for-sale".
    • If the company intends to hold the debt until it matures, it must be classified as a "held-to-maturity" security.
    • When debt is acquired and is intended to be held until maturity, it is recorded first by debiting a "Debt Investment Account," and then by crediting "Cash" for the amount the debt was purchased.
    • Debt securities can be classified as "held-to-maturity," a "trading security," or "available-for-sale. "
    • Summarize how to record the sale of a held-to-maturity, trading security and available for sale debt

  • Key Considerations for the Statement of Cash Flows

    • In addition, the statement is used to assess the following: the company's ability to meet its obligations to service loans, pay dividends, etc.; the reasons for differences between reported and related cash flows; and the effect on its finances of major transactions in the year.
    • Securities that are held for trade are generally investments that a business holds for a very short period of time with the intent to sell for a quick gain.
    • Transactions include the sale and acquisition of property, plant, and equipment; the collection and granting of long-term loans to others; and the trading of available-for-sale and held-to-maturity securities of other businesses.
    • Securities that are held-to-maturity are those that a business plans to hold onto until the security's term is up.
    • An available-for-sale security is an investment that does not qualify as "held-to-maturity" or "trading".

  • Redeeming at Maturity

    • As long as all due payments have been made, the issuer has no further obligations to the bondholders after the maturity date.
    • For coupon bonds, the bond issuer is supposed to pay both the par value of the bond and the last coupon payment at maturity.
    • A description of bonds issued including the effective interest rate, maturity date, terms, and sinking fund requirements are included in the notes to financial statements.
    • Debt securities can be classified as "held-to-maturity," a "trading security," or "available-for-sale. "
    • Explain how to record the retirement of a bond at maturity

  • Zero-Coupon Bonds

    • The coupons and residue are sold separately to investors.
    • Long-term zero coupon maturity dates typically start at 10 to 15 years.
    • The bonds can be held until maturity or sold on secondary bond markets.
    • Zero coupon bonds have a duration equal to the bond's time to maturity, which makes them sensitive to any changes in the interest rates.
    • Pension funds and insurance companies like to own long maturity zero-coupon bonds because of the bonds' high duration.

  • Yield to Maturity

    • The Yield to maturity (YTM) or redemption yield of a bond or other fixed-interest security, such as gilts, is the internal rate of return (IRR, overall interest rate) earned by an investor who buys the bond today at the market price, assuming that the bond will be held until maturity, and that all coupon and principal payments will be made on schedule .
    • The formula for yield to maturity:
    • Yield to maturity (YTM) = [(Face value / Present value)1/Time period]-1
    • Development of yield to maturity of bonds of 2019 maturity of a number of Eurozone governments.
    • Classify a bond based on its market value and Yield to Maturity

  • Yield to Maturity and Rate of Return

    • If investors hold the bond until maturity, then we call the discount rate the yield to maturity.Economists consider yield to maturity the most accurate measure of the interest rates because the yield to maturity allows investors to compare different bonds.For example, you want to buy a coupon bond today for a market price of $1,600.Bond pays $400 interest per year and matures in three years.Finally, the bond pays $1,000 on the maturity date.Consequently, we calculate your yield to maturity of 14.11% in Equation 6.You can compare this yield toother investments and choose the investment with the greatest yield.
    • Yield to maturity generates two important rules on bonds, which are:
    • Market interest rate (or yield to maturity) and the market price (or present value) of the securities are inversely related.For example, if you examine the present value formula, the interest rate, or yield to maturity is located in the denominators of the fractions.Thus, the market price falls as the interest rate rises, and vice versa.
    • You can become confused by the terms used throughout this book.We use yield to maturity, discount rate, and interest rate interchangeably, and you can interpret these terms to mean an interest rate.However, a rate of return differs because investors could sell their securities before they matured.Thus, the rate or return includes the interest rate and capital gains or losses.A capital gain is an investor sells a financial security for greater price, while a capital loss is an investor sells a financial security for a lower price.Investors do not want capitallosses, but they can occur.For instance, an investor must sell an asset whose market price has dropped because he or she needs cash quickly.Thus, the present value still works for capital gains and losses.Finally, if the investor holds onto the security onto the maturity date, then the rate of return equals the yield to maturity.
    • A capital loss is similar.As an illustration, you bought a financial security for $2,000 with a coupon interest rate of 5% and held it for two years.Although you earned two years of interest, this company reported financial trouble, and the bond price dropped to $1,000.Unfortunately, we calculated your return from the investment as a huge loss of -23.3% in Equation 11.

  • Maturity Date

    • Maturity date refers to the final payment date of a loan or other financial instrument.
    • In finance, maturity date or redemption date, refers to the final payment date of a loan or other financial instrument, at which point the principal (and all remaining interest) is due to be paid.
    • The issuer has to repay the nominal amount on the maturity date.
    • The length of time until the maturity date is often referred to as the term or tenor or maturity of a bond.
    • short term (bills): maturities between 1 to 5 years (instruments with maturities less than one year are called "Money Market Instruments");