The binomial theorem states that:
$$(x+y)^n = \sum_{k=0}^n x^ky^{n-k}$$
Expand $(x+y)^3$:
Here we are given $n=3$ and since the binomial starts at $k=0$, it suffices to say that we are expanding from $k=0$ to $k=3$:
$${3 \choose 0} x^0y^3 + {3 \choose 1} x^1y^2 + {3 \choose 2} x^2y^1 + {3 \choose 3} x^3y^0$$
equates to: $y^3+xy^2+x^2y+x^3$
I don't understand how the equation that I used was supposed to give me this: $$y^3+3xy^2+3x^2y+x^3$$
$n$s and $k$s are only in the exponents. I don't understand why and where the $3$ comes from as a coefficient in the two middle terms!? I know the book says that with ${n \choose k}$, $n$ and $k$ can be thought of as binomial coefficients but I cannot seem to make the connection.
What would $(x+y)^4$ look like? Would it have only $4$'s in as coefficients in the middle terms?

The coefficients come from "N choose K," written as $(^n_k)$ - the first component of the binomial theorem's summation. While you wrote out the problem correctly, you forgot to perform this operation.
For $(^3_0)$, there is one way in which we can select zero elements from a set of three. For $(^3_1)$, there are three ways in which we can select one element from a set of three. For $(^3_2)$ and $(^3_3)$, there are three ways and one way, respectively, for selecting K elements from a set of size N.
Expanding $(x + y)^4$ would not result in four's for the coefficients on the middle terms. You would have to perform the operation I described above. Alternatively, you can use Pascal's Triangle: a triangular arrangement of numbers that represents the coefficient of each term in a binomial expansion.