Well,
I am a bit rusty on this but here is my understanding:
1) The terrain grid size is a way of controlling how fine the features are on the map. It doesn't change the map size, but is changes how fine the level of detail is on the map. As a microscopist, I would say it increases the resolution of the map/image. This is the one I am least certain about. The other answers below I fell pretty certain are accurate unless there have been major changes for CO2 that invalidate my answers.
2) This refers to if you are using a bitmap underlay for use as a reference when drawing your maps. If the bitmap reference you want to use is too large, then you can use some other, external program, to break it into smaller pieces. Your options are 1 bitmap, 4 bitmaps and 16 bitmaps. i.e. a single file, a 2x2 matrix or a 4x4 matrix. The number is always upper left to lower right.
3) This removes some of the points on the line or area perimeter; as such it tends to smooth the line/area perimeter. Can help simplify the map and also reduce drawing times if there isn't a pre-made cache included with the scenario files.
I cannot replicate your reported issue with the toggle. It works fine for me.
Let's review the steps:
1) Select the multi-segment line tool.
2) Select any one of the road types.
3) Draw your road with X points on it. They should all be squares at this point. These are Corner points.
4) Complete your new road and return to the pointer tool
5) Using the pointer tool, click on the road to bring up the points.
6) using the pointer tool, click on just one of the Corner points.
7) Click on Ctrl+T - The point now will turn into a circle. It is now a Control Point. If it is any point except one of the end points, you will see the line shift way and now be some sort of curve between the point immediately previous and the point immediately following the new Control point (assuming all of the other points are Corner points - if they are also Control points, then the curve will be 'influenced' by the position of the Control points, but will probably not pass through them, unless you have drawn a straight line). You can now alter the shape of the curve by dragging the Control point around.
(Note: As I explain in more detail below - you can also toggle a point to be a Control point as you are laying the points down. The default is Corner points.)
I hope this helps.
SNAFU.
(Edited to clean up some grammar and to add detail and corrections)