PPP#1 - Authentication

Client/Server authentication

"Client" side:

!

interface Serial1/0
 ip address 192.168.12.1 255.255.255.0
 encapsulation ppp
 ppp chap hostname ROUTER1
 ppp chap password 0 CISCO
!

Server side:

!

interface Serial1/0
 ip address 192.168.12.2 255.255.255.0
 encapsulation ppp
 ppp authentication chap callin
!

username ROUTER1 password CISCO

!

Same kind of configuration for pap:
"Client" side: 
!
interface Serial1/0
 ip address 192.168.12.1 255.255.255.0
 encapsulation ppp
 serial restart-delay 0
 ppp chap password 0 CISCO
 ppp pap sent-username ROUTER1 password 0 CISCO
!
Server side:
!
interface Serial1/0
 ip address 192.168.12.2 255.255.255.0
 encapsulation ppp
 serial restart-delay 0
 ppp authentication pap callin
end

Mutual Authentication (PAP & CHAP):
On r1:
!
interface Serial1/0
 ip address 192.168.12.1 255.255.255.0
 encapsulation ppp
 serial restart-delay 0
 ppp authentication pap chap
 ppp pap sent-username ROUTER1 password 0 CISCO
!
username ROUTER2 password CISCO
!

On r2:

!
interface Serial1/0
 ip address 192.168.12.1 255.255.255.0
 encapsulation ppp
 serial restart-delay 0
 ppp authentication pap chap
 ppp pap sent-username ROUTER2 password 0 CISCO
!

username ROUTER1 password CISCO
!

Don't forget ppp authentication pap chap cmd.

Debug with: debug ppp negotiation.