So basically, the characters found a very old sword that appears to be rusty and useless. But after some events, one is able to draw it from its scabbard and low and behold, there's a demon-spirit-thingy inside it, possesing it. These kind of stuff aint too common for them. What would a realistic reaction be?
"Oh shit!"
Nah, that's the reaction you have when you realize you forgot to take the chicken out of the freezer and your mom pulls up in the driveway.
s h o o k
"B E G O N E T H O T!!!"
TBH, it depends what the character's personalities are. If it's a young impressionable character, they might react with awe and admiration of the person who pulled it out. If it's a jaded old warrior he might react with distrust and caution against using it. Just think about it from your character's perpectives
how common are demon-thingy's? that's also important. If their common he might be scared and confused for a second and then quickly start sort of systematically figuring out what to do and who's help to ask. if they're rare he 's likely to be panicking for a while. (assuming their young and inexperienced with stressful situations)