The real risk free rate is 3.5 percent, and inflation is projected to be 5 percent next year, 6 percent the following year, and 7 percent thereafter. The maturity risk premium is zero for bonds that mature in 1 year or less, 0.3 percent for 2 year bonds a

The inflation premium for a 5 year bond can be calculated as follows: - First, we need to calculate the expected inflation rates for each of the next five years. Based on the projected inflation rates given in the question, these are: - Year 1: 5% - Year 2: 6% - Year 3: 7% - Year 4: 7% - Year 5: 7% - Next, we need to calculate the average expected inflation rate over the next five years. This is simply the sum of the expected inflation rates divided by 5: - Average expected inflation rate = (5% + 6% + 7% + 7% + 7%) / 5 = 6.4% - Finally, we can calculate the inflation premium for the 5 year bond by subtracting the real risk free rate from the average expected inflation rate: - Inflation premium = Average expected inflation rate - Real risk free rate = 6.4% - 3.5% = 2.9% Therefore, the inflation premium for a 5 year bond is 2.9%. This represents the additional return that investors require to compensate for the expected inflation over the life of the bond.