template
A template is a PDF made once and reused as the background of new pages: your letterhead, a plain sheet, the terms you always attach at the end.
In more detail
The file is laid down as it stands, exactly as its maker left it, and the new text is written over it. Every line, every colour and every millimetre arrive on the new page as they were drawn.
That matters because a letterhead is usually somebody else's work: a designer's file, a sheet approved at the printing works. Redrawing it would mean rebuilding it, and getting it slightly wrong. Laying it down keeps it to the millimetre.
What it does on a real document
The first page carries the headed sheet, the pages after it carry the plain one, and the terms are attached at the end unchanged. The text of the letter is written on top of all of it.
One imported page can be laid down as often as you like, and it is stored once in the file however many times it appears. A letter of a hundred pages laid on the letterhead is not a hundred copies of it.
Where it comes from, and why
Printing on pre-printed paper is older than the computer. A firm bought a box of headed sheets and fed them through the machine. Doing it inside the file is the same idea, with the paper included.
The format was built for it from the start: a piece of drawing can be defined once and placed anywhere, any number of times. Bringing in a page from another document is that same mechanism, used on a whole page at once.
See it on a finished document
An agreement built on three supplied templates An invoice laid on a letterhead template