Template literal types in TypeScript let you create new string types by combining existing string types with fixed text. For example, starting with a type Event that can be "click" or "hover", you can create a new type PrefixedEvent that adds "on" before each event and capitalizes the first letter. This results in "onClick" and "onHover" as valid types. When assigning values to variables of type PrefixedEvent, only these exact strings are allowed. This helps catch mistakes like using "onclick" instead of "onClick". The execution steps show how the types are built and checked. Capitalize changes the first letter to uppercase, and the template literal adds the "on" prefix. This powerful feature improves code safety by making string patterns explicit and checked by the compiler.