Of course it understands letters or characters. You can ask it for a list of possible tokenization of a word and it will list them out. You can then refer to this list and refer to different tokens of the word and it will correctly modify the word according to the token. The trick is that you need to emphasize the idea of a token into its current context. That will make the concept relevant for your current prompt.

You have to nudge it in the direction you want, don't assume it always knows what you are talking about.