What does compounded monthly mean?

Compounded monthly means that interest is calculated on a monthly basis rather than on a yearly or bi-weekly basis. When interest is compounded monthly, it is calculated and added to the principal balance each month, resulting in a new principal for the following month. The statement specifies that interest is calculated monthly at 1/12 of the yearly rate, which is accurate, as the annual interest rate is divided by twelve months to determine the monthly rate. This approach allows the investment or loan to accumulate interest more frequently, leading to what is known as "compound interest," where interest earns additional interest over time.

In the context of the other choices, they describe different frequencies or methods of calculating interest. Interest calculated twice a year refers to semiannual compounding, which does not align with a monthly basis. Calculating interest 12 times a year at the annual rate lacks the specific detail about dividing the rate, leading to a lack of clarity on how the monthly rate is applied. Lastly, the bi-weekly method is irrelevant as it does not pertain to monthly compounding at all. Thus, the chosen answer reflects the precise definition and method of compounding interest monthly.