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Marketable Securities: Held-to-Maturity

Moneyzine Editor
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Moneyzine Editor
2 mins
February 8th, 2024
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Marketable Securities: Held-to-Maturity

Definition

The term marketable securities, held-to-maturity is used to describe investments in debt securities that a company intends, and is able, to hold for their full term.

Marketable securities are a subset of short-term investments; as such, they appear on the company's balance sheet as a current asset.

Explanation

Marketable securities are temporary investments one company might make in another, with the hope of providing higher returns to its shareholders. There are two basic types of these securities:

  • Marketable Equity Securities: common or preferred stock investments held by a company in another large corporation.

  • Marketable Debt Securities: short term bonds held by one company in another large corporation.

The accounting treatment of marketable securities depends on whether or not the company acquiring these investments intends to hold them until they mature, trade them, or make them available for sale.

GAAP requires marketable debt securities categorized as "held-to-maturity" or HTM, to be recorded at their economic value, or amortized historical cost. Debt securities are oftentimes purchased at a price that is different than the security's face value. This premium or discount would affect the interest revenue earned, as well as the bond's value on the balance sheet.

Since the intent is to hold these debt securities until they mature, temporary fluctuations in their market price is not recorded on the balance sheet or income statement.

Example

On June 1, Company A purchased ten $1,000 bonds issued by Company XYZ, as an alternative to placing cash in a bank account. The bonds mature in twelve months, and carry an interest rate of 6.0%. Company A intends to hold these bonds until they mature.

The journal entry to record the purchase of these marketable securities is as follows:

Debit

Credit

Marketable Securities: Held-to-Maturity

$10,000

Cash

$10,000

At yearend, the value of the bonds has increased to 1.02, or 102% of par value. Since Company A intends to hold these securities until they mature, this short term fluctuation in market price is ignored. The journal entry to record the value of the interest revenue of $600 would be as follows:

Debit

Credit

Cash

$600

Interest Revenue

$600

Related Terms

  • Marketable Securities
    The financial accounting term marketable security is used to describe both debt and equity securities held by a company. Marketable securities is a subset of short term investments, as such it appears on the company's balance sheet as a current asset.
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  • Marketable Securities: Available-for-Sale
    The term marketable securities, available-for-sale is used to describe investments in debt and equity securities that a company does not intend to trade for profit or hold until maturity. In practice, marketable securities that are "available-for-sale" are those that are not classified as either "trading" or "held-to-maturity." Marketable securities are a subset of short-term investments; as such, they appear on the company's balance sheet and are classified as a current asset.
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  • Marketable Securities: Trading
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  • Equity Method
    The term equity method refers to an accounting approach used when an investor has controlling interest or significant influence over another company. In practice, the equity method is used by companies that have a significant economic interest in another. This accounting method requires companies to periodically adjust their net assets as the value of this economic interest changes over time.
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  • Cost Method
    The term cost method refers to an accounting approach used when an investor has passive interest in another company. In practice, the cost method is used when an investor (company) does not have a controlling interest or is unable to exert significant influence over the investee, but has made a long-term investment in that company.
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