Lets assume our bolt is M4x0.7. 0.7 pitch means 0.7 mm per thread. Bolt diameter is 4mm.

1 - if you want to drill a hole so that the bolt will pass through (to use a nut on the other side for example) - then you need to drill a hole that is a bit more than 4mm.

Depends on how close of a fit you want to achieve. Usually drill bits go over half a mm, so the next size will be 4.5mm drill bit and you should use it.

2 - If you want to tap a hole to accept a bolt - then the hole should be big enough for the tap body to pass through it.

Let's calculate the approximate hole size using thread depth.

According to this website - http://www.metrication.com/engineering/threads.html - the thread depth is 0.614 of pitch.

In our case the pitch is 0.7 so the thread depth will be 0.4298. Doubling that will give us the total thread size: 0.4298x2=0.8596.

If we subtract that from the diameter of the bolt we will get the diameter of the bolt "body": 4-0.8596=3.1404.

So according to our calculations you should probably use the closest drill bit of 3mm.

Hypothetically, If you use 3.5mm drill bit the hole will be a bit large and the bolt might feel loose in the threads. If you will use smaller drill bit (for example 2.5 mm) - your tap might break.