Thread: What's the difference between the two compound interest formulas?

Hi, I've read about two different compound interest formulas. One of them is described as the "continuous" compound formula. It said that it is used when something compounds immeasurably often, however an example was given using a bank account. Both formulas seem to be able to be used for bank interest problems. The continuous compound formula seems easier to use and uses the natural (e) base. There must be a difference between the two formulas?

It depends on whether the problem states that there is discrete compounding or continuous compounding. For example, if they say the interests compounds quarterly, you use the first formula with n = 4 periods per year.

The continuous compounding is just the limiting case of discrete compounding. If you were to determine the limit as n goes to infinity, you'd end up with the continuous compounding formula. You use it when the problem states that it requires continous compounding.