Read Steve Ringlee's 700/900 FAQ for knock sensor test. I think you will find that Jim's procedure from the Bentley manual applies to one type of ignition but not Bosch. Perhaps the following procedure will help.

Connect test diode Volvo tool #5280 (or LED from Radio Shack connected in series with 750 ohm resistor, will work just as well for a couple of dollars) black lead to connector on drivers side of the car wheel housing near steering fluid reservoir (RED AND YELLOW LEAD). Connect red lead of tool or LED to battery. Use enough wire to run LED to passenger compartment or at least to hold it with windshield wiper where yoo can see while driving the car. Turn ignition on and diode should stay lit. Start the engine and run it about 900 rpm. Diode should now go off. Drive the car under light and heavy engine loads. If diode flahes 4 times, chech knock sensor wiring. If wiring checks OK, replace knock sensor and run above check again. If diode continues to flash with road test, you may have to replace the ignition control unit.

If you get a new knock sensor, please let me know what resistance it shows. Please, let me know how you solve your problem because it may help me to solve mine. Good luck.