Final answer:
The 5-year, 14% coupon bond has the smallest price volatility because it has the highest coupon rate, providing a cushion against interest rate fluctuations and resulting in a shorter duration compared to bonds with lower or no coupons.
Step-by-step explanation:
The bond with the smallest price volatility, holding other factors constant, is the 5-year, 14% coupon bond.
Price volatility in bonds is affected by two main factors: maturity and coupon rate. Bonds with longer maturities and lower coupon rates generally exhibit higher volatility because they have a longer duration and are more sensitive to changes in interest rates. Given the options provided, a 0% coupon bond would have the highest price volatility since it has no regular interest payments to mitigate the effect of interest rate changes, often referred to as a zero-coupon bond. In contrast, bonds with higher coupon rates, such as the 12% and 14% coupon bonds, have lower volatility because the regular interest payments provide a cushion against interest rate fluctuations.
Therefore, among the given choices, the 5-year, 14% coupon bond has the smallest price volatility because it offers the highest coupon rate, resulting in a shorter duration compared to bonds with lower or no coupons.