Bone Dragons are located on Desert Islands. Bone dragons only "activate" when you're close by (within few feet). I believe you can find them on desert island level 4+, these dragons are usually around level 108 so, be warned. There are 2 types of bone dragons, fake and real ones. The real ones look a bit more destroyed. Walk up to a bone dragon and if it doesn't wake up it's the fake one.
As pointed out by Jay Cowl if you die go back to where the dragon was, its health does not reset.
It also doesn't matter if you use magic or swords, as long as you hit its core.
If you're struggling with the fight here's my one shot build (Deals about 60-70k per hit)
2x 400+ ATK weapons
Combat skills:
Charge strike - lvl2
Battle hymn, dual wield, berserk, backwater formation, unstoppable, lai slash - all max lvl
Lean force - lvl1
Wild Might - max level
Before the boss room eat raw meat and apply all 3 buffs, come up to the boss and use Lai Slash, boom 70k damage. Warning you're extremely vulnerable with the buffs on.