I'm not entirely sure if I'm missing something or if this is how it's supposed to be, but all my arrows are 4 damage. Normal?

If your character is at a low level, the only arrows are iron with 4 damage, and steel with 5 damage. As you increase your level other better arrows will come into play and they have higher damage numbers. If you have Glass, Elven or Ebony arrows with a 4 rating, then something is not right.

The damage an arrow does (or any weapon) depends on the character's skill. At the start, you won't have many choices of material, and won't get the full damage potential of the ammo.

"WeaponRating = BaseWeaponDamage * 0.5 * ( 0.75 + Attribute * 0.005 ) *
( 0.2 + ModifiedSkill * 0.015 ) * ( WeaponHealth / BaseWeaponHealth + 1 ) / 2"

Weapon health doesn't apply to ammo, and the other modifiers are very small when you start, so effectively you're getting base * 0.5, or half-damage.
Iron is 8 * 0.5 = 4 and Steel is 9 * 0.5 = 4.5 (shows as 4, but is a little better).

The damage from the bow adds to the damage from the arrow. So if your bow does 5, then each shot with an iron arrow does 5 + 4 = 9.

Just to confirm the low damage for low level characters, I checked on a level 2 I recently started who has 31 Marksman skill, 45 Agility, and 50 Luck, and his arrows are 3 damage each (Iron and Steel), and bows are also 3 damage each (Iron, Steel, Fine Steel).

Typical for those levels. He hasn't come across any stronger arrows and the difference in damage between the arrow and bow types is not large enough to exceed the roundoff so they are all the same.