Sound has a whole range of frequencies, which if you want to lump into only 3 categories is bass, midrange, and treble. As CurtC said, when you change the bass and treble you are boosting or cutting them with respect to the midrange, which is left unchanged. So, if you boost the bass and the treble, you are effectively increasing the overall volume but cutting the midrange. It’s not the same as just cranking up the volume.
There are several reasons to boost or cut the treble and midrange. One is what CurtC said, to compensate for your speakers. If you’ve got itty bitty speakers chances are they just can’t push enough air to have a good bass response, especially at higher power levels. So, you can make up for their inadequacies by boosting the bass. Or, maybe you have monster cheapy speakers, which are huge but just stink on high end frequency response. So, you boost the treble to compensate for it.
A second reason to change it is to compensate for the fact that your hearing isn’t linear. At low volume levels you don’t hear the frequency extremes as well. Some stereos have a “loudness” button that you can push which boost the highs and the lows, and it is intended to be used at low volumes. If you don’t have a loudness button you can crank up the bass and treble at low volumes to do the same thing.
A third reason to change it is just personal preference. Some people like a big booming bass. Makes them feel like they are in a dance club or something, I dunno.
Tone bypass switches are typically only found on higher end systems. It’s so they can get a really flat frequency response when they do lab testing (makes the published specs look better). From a practical matter your ear probably can’t hear the difference.
Bass and treble are fairly crude controls and often modify frequencies that you don’t want to modify. For example, if you’ve got cheapy speakers they may do ok for most of the bass and treble range but may not work so well at the extremes. With bass and treble knobs you can kinda compensate for this, but you end up boosting some frequencies that the speakers do respond to ok as well as boosting the frequencies that they don’t respond to ok. This is why graphic equalizers were invented. Instead of just 2 controls (or 3 if your stereo has a midrange knob) you separate the audio spectrum into 10 or 12 bands (or however many bands the equalizer has) which gives you finer control.
Maxing out the knobs increases the volume for those frequencies. If your stereo system is designed properly you should be able to max out the knobs and crank the volume all the way to 10 (or 11 if you are Nigel) and not do any damage.