Laser printer or inkjet?

The kind of paper and whether or not it's bleached is immaterial, as long as it's reasonably smooth and fairly bright: rough paper might introduce artifacts which don't reflect the actual quality of the outlines. Likewise, screening the letters may distort the outlines, so pure black would be preferable.

It depends on the typeface. If it's a text face, then you should make some test documents that have text set in the way you aim the typeface to be used. Is it a book text typeface then set some representative pages of a literary text. Is it a newspaper typeface then design a mock newspaper. Is it a dictionary typeface, then design a few pages of a mock dictionary. You get the idea?

Also, you should choose a language for which you design the typeface. From one language to another there are different frequencies of characters, of ascenders and descenders, diacritical marks, and capitalization rules (German capitalizes all proper nouns eg.). This can change the colour and texture of the columns of text a great deal.

Points to consider: Stick to one point size of your test text so you can compare changes to the typeface design by comparing your stack of prints. Annotate the prints with the font version and the date and time it was printed. You can setup Indesign to do the date & time automatically.

Expand the sophistication of the test document as you add glyphs and features to the font.

Find one acceptable quality high resolution laser-printer. Compare it's output to off-set printed materials. Some laser-printers are too dark, others too light, some are quite close to off-set print, but they are always unsharp/low-resolution.

You should print in black if it's a text typeface you are designing. Greyscale is pointless.

As for paper, choose something close to the intended medium as per my preceding remarks.

When you have a design down on your laser-printer, try to have it off-set printed to fine tune the design.

cf. http://typophile.com/node/15453

What kind of paper?

The cheapest office paper that will run through your laser printer without making it jam. Because once you get serious about your proofs you will be printing a LOT. Right now I’m finishing up a family with eight masters and blasting through a few hundred pages of proofs a week.

The letters in dark-grey or black?

Black—grey is not a solid color.

Bleached paper or not?

Definitely bleached, because most printing is done on white paper.

What settings in Adobe Reader?

Set up your proofs in a layout program, you shouldn’t be using Adobe Reader at all. I do almost all of my proofing in Indesign, which is very convenient because it makes it very easy to swap out fonts throughout the document and I can create looping nested styles for proofs that compare multiple fonts character-by-character.

Thanks to all of you.
@oldnick: inkjet and I can't afford a laserprinter.
@Dunwich: I make my proofs in inDesign, but the settings for printing (e.g. how many dpi) are in Adobe Reader.

I can't afford a laserprinter

Times have changed; you can get a decent monochrome laser printer for around $100; I bought a Samsung full-color laser for $250...

You cannot afford to NOT have a laser-printer. It's much cheaper in consumables.

You cannot afford to NOT have a laser-printer. It's much cheaper in consumables.

Absolutely true. Toner costs much, much less ink.

Oh yeah, and here's another tip: Generate the font into the Indesign fonts folder, and Indesign will instantly use the new font file – no questions asked.