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May be a stupid question, but I don't know the answer. Suppose someone asking me money for a mortgage for buying something. If I know the chance (mean value of payments and variance of payments) that the guy can repay me, how can I calculate the fair interest on the mortgage?

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Apologies if this is an irrelevant question, but what do you mean by "fair" interest? An interest rate that generates a pre-specified profit margin for the issuer? –  Corcovado Dec 13 '13 at 20:47
    
An interest to break even in the long run. –  emanuele Dec 13 '13 at 22:15
    
Default risk is only one of many factors that determine the interest rate on a mortgage (or the price of a MBS). You need to be more specific. This forum is not the appropriate place to ask someone to summarize mortgage pricing or MBS valuation. –  Joshua Ulrich Dec 31 '13 at 19:43
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