Hi Dan(s)!

> Do you know of any recordings of traditional folk ballads or the like,
> that would give us a better idea of how it should sound?

I'm trying to tell you I don't know how it should sound! :)
But I can recommend the CD Voices (Raddir) for traditional
Icelandic music. Be aware that the typical Icelander is
probably not aware what constitutes to the older Icelandic
musical traditions. Poetry by the romantic poets sung to
tunes by 19th century German composers may be his idea of
a folk song ;)

The Faroese musical tradition is somewhat more alive and even
a random group of natives can probably perform something for you.

Kveðja,
Haukur