Spoiler
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The sword is located in the inn which is located in the City Gates....Its behind a secret wall.If the fight is too tough try this:
When u Go in, there should be a Lich(i think) inside, he will cast time stop and then cast lots of other spells and also summon a monster,since i had a low level then, i went in took the sword from the chest inside then ran out and rest in the inn while the two stupid enemies wait inside hahaha,after resting, go in and the monster he summoned should be dead thus giving u a relatively easy battle.
(i hope yall understand)
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