Copy is the text you submit for publication in a book or article (the same term applies in newspaper and magazine publishing).
If your copy is 'clean' - and it should be - it will need little editing before it can be published. This doesn't mean that it's not covered in coffee stains and cat hairs, although it did also mean that in the days when you sent in a wodge of typewritten pages. It means that your copy is not peppered with grammatical mistakes and spelling errors, it hangs together properly and does what it says on the tin. Doing what it says on the tin is important. If you are supposed to submit a 500-word biography of a classical composer and you send 800 words that are mostly a critique of his music, you have done the wrong thing and can't expect the editor to be pleased - nor even to publish the work you have laboured over for so long. If your outline promised a 40,000-word novel for 10-year-olds, but you actually send 40,000 words written in language accessible only to a 13-year-old then again this is not what it said on the tin and you will be in trouble.
Editors like clean copy because it means they don't have to do much work. Or, rather, they only have to do their own work - they don't have to do the work you should have done properly in the first place. The bottom line is that 'copy' should be as close to the text finally published as possible. Improvements the editor makes, in consultation with you, should be adding the benefit of the editor's expertise and alternative view, not fixing the things you screwed up. The editor may work hard to fix the book they have already commissioned from you - but they sure as hell won't commission another if the copy you send is a mess. Copy is not a draft. Drafts are your steps towards copy.
Copy, of course, must also be presented in the correct way. That means an ordinary font - preferably Times New Roman - in a legible size (often 12 pt) with large margins and 1.5 or double spacing. Don't use lots of fancy styling and fonts and changes of colour or text size. Firstly, it annoys the editor to have to strip all that gumph out. Secondly, it obscures essential details, such as how long the copy is. An editor used to receiving all copy in 12 pt Times can see at a glance how many final pages your chapter will work out to - but if you have sent it in 14 pt Comic Sans they can't do that. You are making their job more difficult as well making yourself look unprofessional.
Now, it's not my job to tell you how to format your copy. There is plenty of advice on that elsewhere (Nicola Morgan pronounces on it now and then, so take a look on Help! I need a publisher). And there are plenty of people who blame their lack of a contract on having used Times 11.5 pt instead of Times 12 pt - not so. If your book is good, the editor is not going to turn it down for that reason. If it was turned down, it's because the editor didn't want it (for whatever reason).
If the editor gives you a house style to work to, follow it. If not, use a sensible and fairly plain format. It's your writing the editor is interested in, not your skill in making fancy Word documents. (In fact, making fancy Word documents is skill that has no market value whatsoever - designers work in Quark or InDesign, and no one makes a 'real' document in Word.) Making things look fancy is the designer's job - you're not the designer. The publisher has a designer. What it doesn't have is someone who can write decent copy. Do your job, and do it properly - leave other people's jobs for them to do!