- Held-to-maturity is a strategy where an investor commits to holding a financial asset until its maturity date, regardless of market fluctuations.
- This strategy provides a predictable stream of income through interest payments and ensures the return of the principal upon maturity.
- It's a conservative approach that offers stability and minimizes exposure to short-term market volatility.
How does Held-to-Maturity work?
When an investor designates an asset as held-to-maturity, they are expressing their intention to hold the asset until it reaches its maturity date. During this period, the investor receives periodic interest payments and the return of their principal upon maturity. Unlike trading or available-for-sale securities, held-to-maturity assets are not subject to frequent buying and selling based on market fluctuations.
Held-to-Maturity in the real world
Let's say an investor purchases a held-to-maturity bond with a face value of $1,000, a coupon rate of 5%, and a maturity of 5 years. The investor plans to hold the bond until maturity. Over the 5-year period, they receive annual interest payments of $50 (5% of $1,000) and, upon maturity, receive the full $1,000 back. Regardless of how the bond's market value fluctuates during those 5 years, the investor remains committed to holding it until maturity.