Step 1: Recall the effect of refraction on the apparent position of objects.
When light passes from one medium to another (e.g., air to water), it bends due to refraction. For an observer in the denser medium (water), objects in the rarer medium (air) appear closer than their actual position. This is because the light rays bend towards the normal as they enter the denser medium.
Step 2: Apply this principle to the scenario.
The fish inside the water sees the bird as being closer than its actual distance due to the bending of light at the air-water interface.
Final Answer: The bird appears to be \( \mathbf{\text{closer than the actual distance}} \), which corresponds to option \( \mathbf{(2)} \).