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

SUMMARY

• Held-to-maturity investments are those which are bought with the ability and specific intention to hold such investments until the maturity period of the instrument.
• A debt instrument with a variable interest rate can satisfy the criteria for a held-to-maturity investment.
• 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 a floating rate financial instrument is recognized initially at an amount equal to the principal receivable or payable on maturity, re-estimating the future interest payments normally has no significant effect on the carrying amount of the asset or liability.
• Default risk is no bar to the classification of a financial asset as held-to-maturity as long as its contractual payments are fixed or determinable and the other criteria for that classification are met.
• Perpetual debt instruments that provide for interest payments for an indefinite period cannot be classified as held-to-maturity because there is no maturity date.
• Equity instruments cannot be classified as held-to-maturity investments because they have an indefinite life. Also the amounts the holder may receive can vary in a manner that is not predetermined, such as warrants or other similar rights.
• A financial asset that is callable by the issuer can be classified as held-to-maturity if the holder intends and is able to hold it until it is called or until maturity and the holder would ...