Accounting for Investments, Volume 2: Fixed Income Securities and Interest Rate Derivatives—A Practitioner's Guide

MEANING OF SECURITIES CLASSIFIED AS HELD-TO-MATURITY (HTM)

Held-to-maturity investments are those bought with the ability and specific intention to hold such investments until the maturity period of the instrument. However, an entity does not have a positive intention to hold to maturity an investment in a financial asset with a fixed maturity if:

a) The entity intends to hold the financial asset for an undefined period;

b) The entity stands ready to sell the financial asset in response to changes in market interest rates or risks, liquidity needs, changes in the availability of and the yield on alternative investments, changes in financing sources and terms or changes in foreign currency risk; or

c) The issuer has a right to settle the financial asset at an amount significantly below its amortized cost.

d) Hence, such investments cannot be classified as held-to-maturity.

Variable interest rate instrument

A debt instrument with a variable interest rate can satisfy the criteria for a held-to-maturity investment. Fixed or determinable payments and fixed maturity mean that a contractual arrangement defines the amounts and dates of payments to the holder, such as interest and principal payments. The interest rate itself can be variable meaning it can be based on any benchmark interest rate.

Floating rate instruments

For floating rate financial instruments, periodic re-estimation of cash flows to reflect movements in market rates of interest alters the effective interest rate. If ...