Projections for inflation for the next few years are as follows:
year 1 2%
year 2 3%
year 3 5%
a) Calculate (and show your work) the inflation premium for a 2-year bond -- in other words, what is the average annual inflation over this bond's life?
b) Calculate (and show your work) the inflation premium for a bond maturing in 3 years -- in other words, what is the average annual inflation over the life of this bond?