I think you're getting side-tracked into credit risk which is not what the paper is about at all. But your example is useful to understand why credit risk is no

I think you're getting side-tracked into credit risk which is not what the paper is about at all. But your example is useful to understand why credit risk is not as simple as that. For a start, considered in the context of formal loans, lending money to a friend in that situation is far from a risk-free bet - because my friend might have got it wrong and left his wallet at home, not in his car in which case in 5 minutes time he'll default on payment. Of course I'll almost certainly get my money back eventually (since otherwise I'd either have just said I'd give him the money or declined to either lend or gift it), but now your talking about the risk that I'm deprived of my money for longer than I had anticipated as well as having the the cost of using my time in chasing him for it, so I'd want some interest to compensate for that risk. In reality, what we do is (to some extent) to agree a social convention that "next time it will probably be the other way around" so that those potential losses even out between us and it makes sense that we reduce our administrative burden by not charging each other for them in the form of interest. What is true is that as the time a loan is outstanding reduces, ability to judge the repayment risk is likely to improve to some extent in most cases. However even this isn't universal - for example if I lend against you receiving payment on an invoice just issued and where yuou have given your customer 30-day payment terms, I'm likely to have better certainty lending on a 60-day repayment term than a 1-day repayment term.