Barney did a good job on describing the condition.
Blood pressure inside that erect penis is tremendous - in excess of 5000psi - if they 'miss the hole' or get a kink in the process - not uncommon for inexperienced young bulls - they get a disastrous 'blow-out'.
If you don't pull the bull, every time he tries again, you're pumping more blood into that area. If some bacteria happen to hit into that big blood clot, you can end up with a big abscess.
Most run-of-the-mill bulls are not worth the $$ it would take to attempt to properly repair the injury; and the lost breeding season(s) - you're better off sending him to slaughter and buying another bull.
I'm far enough removed from my vet school days at Auburn(War Eagle, Barney) when most of our beef work was working on peckers and prepuces, that I don't recall, off the top of my head, the length of rest required before putting the bull back into service, but 60 days seems a bit short.
A percentage(fairly low) of bulls WILL heal and return to service, but the healed area is never as strong as the original undamaged tunica, and in many cases, they develop some vascular shunts that prevent them from being able to adequately maintain an erection. And, with that explosive blow-out, the dorsal nerves of the penis, which run right along the top side, are often destroyed, and even if the bull can achieve an erection, and doesn't develop adhesions which prevent him from being able to extend, he can't 'feel' to know when he's in the cow, and may not be able to ejaculate.
Your offer for $1000 - half the purchase price - is more than fair, particularly in light of the fact that he got at least one breeding season out of him. You had no responsibility, and it certainly was not a defect, just an accident - what if this bull had gotten out on the highway and got hit by a bus? Would this guy expect you to refund his money?
But if you're aspiring to have a good reputation as a seedstock producer, a goodwill gesture like this on your part should do nothing but improve your standing. The most I'd consider doing is splitting the difference between what he brings, sold for slaughter, and what the purchase price was.