Final answer:
To calculate the effective rate of interest compounded yearly, use the formula: Effective Rate = (1 + (Rate / n))^n - 1. In this case, the interest rate is 12% per year compounded yearly, so the effective rate is 12%.
Step-by-step explanation:
Compound interest is interest that is earned on the principal as well as on any previously earned interest. To calculate the effective rate of interest compounded yearly, we can use the formula:
Effective Rate = (1 + (Rate / n))^n - 1
In this case, the interest rate is 12% per year and compounded yearly, so n = 1. Plugging in the values, we get:
Effective Rate = (1 + (0.12 / 1))^1 - 1
= (1 + 0.12)^1 - 1
= 1.12 - 1
= 0.12
The effective rate of interest is 12%.