On the two wire type it is essentially a generator in itself. They have a permanant magnet and a wire wound coil within the sensor. The action of the reluctor wheel passing by the end, causes oscillating magnetic fields inside the coil - the reluctor itself is not magnetic, but in simple terms it passes through the magnetic field of the sensor's internal magent and as the coil is also in the same magnetic field an EMF is set up in the coil. The sensor output is AC. Can be viewed with referance to ground on either wire using an oscilloscope but half of the amplitude is lost. Must be viewed just across the two wires for full amplitude.
The breakdown occurs when the coils start to short out and so the EMF is lowered due to some turns being bypassed. A complete breakage in the coil is ofcourse shown as open circuit when checked for continuity.
Typical output voltage anywhere from 0.5 - 5 VAC. Amplitude increases with speed upto a point, as the flux is being cut more quickly. Output is a sine wave.
A true 3 wire device is a hall sensor, that is fed with 5v, and the reluctor wheel either allows the voltage to flow through the sensor or not. So giving a square wave in DC. The three wires would be 1. +5v supply, 2.Ground 3.Sensor output, it is the output wire that exhibits the square wave.
If you want to learn more and see some example waveforms, go to picoauto.com and download the picoscope automotive software - its free and included demo waveforms - you don't need a scope to view the demo waveforms. Loads of back ground info on how things work on and around the car.