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, marketable securities: available-for-sale, marketable securities: trading, ownership interest, equity method, cost method