The sword of the lake was a weapon Connor received from the Lady of the Lake after he had rung the Large Silver Bell with his Axe three times. He no longer needed the axe so he discarded it near the bell. He later discarded it for the Double-edged Sword.
Behind the scenes[]
The sword can be used as one of the three alternate 'non-combat' (I.E. defeating the enemy without actually physically fighting it by jumping off the mausoleum) solutions for defeating the Spriggan near the mausoleum to obtain the Crossbow. Conner will jump down, tap the spriggan on the shoulder, and stab it as it turns around to face him.
More points are earned for defeating the spriggan in this manner than simply killing it directly while its shooting at Connor.