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Due to an even longer and more complicated story (changed the car from auto to stick, and swapped the rear end) I have a speedometer with the opposite problem. Unfortunately, this is on a 740, so we can't just swap them and see if it is solved.
Does the replacement unit read consistently high, or does the percentage of error increase along with the speed of the car?
To answer your questions:
The sending unit on the rear axle is operating correctly if the speedo works when the car is moving, even if it reads incorrectly. It may be that the sending unit is the wrong one for the speedo you now have. If you don't have ABS, you may be able to fix the problem by swapping the sender. If you have ABS things get more complicated.
The wiring to the sensor sometimes frays or breaks. When this happens, the speedo doesn't work (at all)
The best hope for the "new" speedo might be to send it back and get another one under the warranty.
If both the original and the replacement are K10042, there is some other designation you need to be aware of. The difference between the two may be due to year, a different number of teeth on the tone ring (the thing that the speed sensor reads) or it may be between manual and automatic transmission cars (which have different axle ratios)
Try to make sure the replacement comes from an 89 automatic, with or without ABS, whichever yours is. There may well be other years that will work, but without a parts book, I am unable to tell you.
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