This is quite simple to do, though I can only give you the instructions for Word 2007 as that is what I'm running, you might be able to translate these over to whatever version of Word you are running.

1. At the location within your document where you want the hyperlink, select the Insert menu bar, then Hyperlink
2. In the Text to Display field, type in the text you would prefer to see rather than the long URL
3. Existing File or Web Page is selected for you by default
4. Browse through the directories for your document you wish to link to
5. Once you have selected the file, click the Bookmark button and select the bookmark within the document you wish to jump to when clicking the hyperlink (you will need to have set up the Bookmarks in the document you are linking to in advance)
6. Click OK

You should see a blue, underlined link to your selected document appear.

Note: You will need to press CTRL when clicking this URL as Word is trying to protect you from accidentally clicking the URL as you edit your document.