Yes I have noticed that if an item is part of a quest task, even if it states something about what you want to do with the item, unless you actually see it in your inventory, it's not a true inventory item, if you DO see it in your inventory, if it has the alternating brown/tan border <may vary on your computer> then it's still a quest item and will vanish at the end of the quest regardless of what you do with it. I have a feeling that for this quest it's a bit of misprograming on the Dev's part to imply or not make it clear that this isn't going to become a permanent item in your monarch's inventory even if you do state to give it to them, it's also possible that if your monarch isn't the appropriate level to use the item it wont be placed in their inventory.
However as it stays in your Blacksmith's recipe list in the future I would imagine there is some way to get all the needed ingredients again, probably thru trade with other countries, to be able to manufacture another sword, and then physically drop it into the inventory of the Hero you want to have it.
What I have been doing so far to bypass the questing limitation of not being able to select all Hero's so you can make them interact is I will use the 'showallquests' command in the Ctrl-Shift-C screen and choose the 'Free Play' one. Then simply trade what I need to trade between my Heros, then quit the 'Free Play' quest. This takes me back to the main kingdom screen and as long as I still have QP's to spend it lets me continue on with selecting quests to run twords whatever Ambition I may be on. This has not been extensively tested by me as far as using this code to go back and forth like this so YMMV but SO FAR it hasn't broken my save in this particular ambition. I believe the technical "end" of your progress in an Ambition is when you reach 0 QP's in the kingdom, and that is why it's letting me do this without screwing anything up so far.
