A Master Template is what you might think of as a traditional template. Master templates can contain often-used text, graphics, content management, etc., and that is carried to the new campaign template when the Master template is applied to a campaign. This template is only available to System Administrators/Template Composers.
A Campaign Template is a template stored inside a campaign. It may be an in-progress template, available to End Users, or inactive. This is the template End Users will use to generate documents.
When applying a Master Template to a campaign, this initially creates an identical Campaign Template, but then the Template Composer can make tweaks/edits specific to the new campaign template. This saves Template Composers time and effort because they don't have to create each campaign template from scratch.
Once the Master Template is applied to a campaign, there is no connection between it and the new campaign template (i.e. you can't write changes back to the Master template). If you need a Master template with the updated changes, you can use the Clone to Master feature on your campaign template.