You're using a Kinematic body. That means you decide it's position, not the physics engine, so it will happily let you embed it in a wall.

transform.Translate

Doesnt detect collisions..

Try to add a force or use transformdirection! http://unity3d.com/support/documentation/ScriptReference/Rigidbody.AddForce.html http://unity3d.com/support/documentation/ScriptReference/Transform.TransformDirection.html

if(Input.GetKey(KeyCode.UpArrow))
    rigidbody.AddForce(Vector3.forward * 0.5f);

if(Input.GetKey(KeyCode.DownArrow))
    rigidbody.AddForce(Vector3.forward * -0.5f);

if(Input.GetKey(KeyCode.LeftArrow))
    rigidbody.AddForce(Vector3.right * -0.5f);

if(Input.GetKey(KeyCode.RightArrow))
   rigidbody.AddForce(Vector3.right * 0.5f);

A kinematic rigidbody isn't under physics influence, as @Warwick Allison said. You should uncheck isKinematic and useGravity (since your ball floats). It's also better to store the initial height and add Mathf.Sin to it - if you use Translate, it can accumulate errors and after some time the ball may be landed or too high. Try this script:

public float _floatHeight = 0.1f;
public float _floatFrequency = 3f;
public float speed = 5f;
float y0;

void Start(){
    rigidbody.isKinematic = false;
    rigidbody.useGravity = false;
    y0 = transform.position.y;
}

void Update() {
    Vector3 pos = transform.position;
    pos.y = y0+_floatHeight*Mathf.Sin(_floatFrequency*Time.time);
    transform.position = pos;
    Vector3 dir = new Vector3(Input.GetAxis("Horizontal"),0,Input.GetAxis("Vertical"))*speed;
    rigidbody.velocity = dir; // set the horizontal velocity according to controls
}