Ariel sings this to Ferdinand while he/she is invisible. The song tells him that his father lies under thirty feet of water, or roughly five fathoms. This is sort of synonymous with "six feet under" or "Davy Jones' Locker."
Therefore, his bones are now made of coral, he has pearls for eyes, and he's pretty much a part of the ocean. A "knell" is an especially solemn bell used for funerals and associated with death.
Prospero has ordered Ariel to do this in exchange for the sprite's freedom, which he tends to promise and rescind at will. Ferdinand has just washed ashore after Prospero used his magic to shipwreck his crew. Prospero wants Ferdinand and Miranda to fall in love with each other, so he has Ferdinand falsely believe that his father, Alonso, died with the rest of the ship to separate him from the abandoned crew. Ferdinand becomes completely enraptured with Miranda at first sight and completely forgets about the grief of losing his father after meeting her. Prospero plans to use the two lovers as chess pieces in order to re-gain power and get back at Alonso in one blow.