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What is Held to Maturity?

Jim B.
Jim B.

Held to maturity is an accounting term that refers to a security that a company or individual has no intention to sell. In contrast, the intent with such a security is to hold onto it until it reaches its expiration date, at which point the investor collects the original investment along with interest earned. The most common type of security held to maturity is a bond. Such securities are classified on financial and income statements specifically as this type of instrument and are reported at amortized cost, which means the lump sum of the investment is parceled out over its life span.

Investments are made for all kinds of purposes and with all kinds of strategies attached to them. As opposed to stocks, bonds are usually purchased by investors to be held to maturity, which means they will not be sold at any time. This type of investment usually represents a safe play by investors, as bonds are often backed by powerful banks and usually come with interest payments guaranteed. Investors generally just have to wait out the period of maturity and then reap the rewards.

Man climbing a rope
Man climbing a rope

Whereas individuals are often forced to take loans from a bank, bonds are the reversal of that arrangement. In the case of bonds, the investor is actually loaning her principal payment to the bank or financial institution in question, and the bank then repays that loan with interest. The interest amount is usually set by the bank at the beginning of the bond agreement. For example, a $1,000 US Dollars (USD) bond that pays 10 percent interest would yield the investor $100 USD every year.

The amount of time that the bond will be held to maturity is also determined when the investor purchases the bond. When reporting the bond for income tax purposes, any rise or fall in the market value of the bond has no bearing on the investor's tax burden. Instead, such a security vehicle is reported each year at its amortized cost.

This makes a security that is held to maturity unique within the concept of accounting based on intent. It contrasts from trading securities such as stocks, which may be bought and sold at will. Any value changes in stocks, along with gains and losses from those changes, must be reported for income tax purposes. If an investment is not intended to be either held to maturity or actively traded, it is considered to be available for sale, which is the default category for investments that don't fall into either of the first two categories.

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