This is the hole for the tang, correct? If you are using a guard-plate/bolster/ferrule, you can get by with using a bit that is larger than the thickness of the tang, as the epoxy will fill it and the bolster/guard will cover it. Just make sure the tang is snug in the hole, you do not want it to be able to turn. If there is no guard-plate/bolster, you will need to use a bit that is no thicker than the tang, otherwise you will have a visible gap.
To turn a round hole into a rectangular slot, research a tool called a 'handle broach'.... a ground down (narrow) sawsall blade will make a good improvised one, but a proper one is not hard to make.