What is the capacity of a StringBuffer?

It's the size of internal buffer. As Javadoc says:

Every string buffer has a capacity. As long as the length of the character sequence contained in the string buffer does not exceed the capacity, it is not necessary to allocate a new internal buffer array. If the internal buffer overflows, it is automatically made larger.

Yes, you're correct, see the JavaDoc for more information:

As long as the length of the character sequence contained in the string buffer does not exceed the capacity, it is not necessary to allocate a new internal buffer array. If the internal buffer overflows, it is automatically made larger.

See: JavaSE 6 java.lang.StringBuffer capacity()

But your assumption is correct:

The capacity is the amount of storage available for newly inserted characters, beyond which an allocation will occur