Windows by default guides you to set a password for each account that you set up. It does not force you to set a password, though.
Even if you set a password, Windows will allow you to change your settings to automatically log-on without having to enter your password. Some people like that. Others want to keep their computer more secure and require a password.
Windows will go to sleep if you don’t do anything for a while (whatever duration you have set). All you have to do to wake up Windows is to press a key or move the mouse.
When Windows wakes up, by default it does not require a password. However, you can change that.
In Windows XP, the checkbox to require the password on waking up, was located on the Power options dialog box.
In Windows 7, it’s available via the Windows Control panel > Hardware and Sound > Power Options section of links.
Notice that the password options are grayed, meaning that they are not modifiable at the moment. That prevents accidental change.
In order to change the password options, first, you need to click on the blue link "Change settings that are currently unavailable."
Then, click on the radio button for "Require a password (recommended)" and click Save Changes.
That’s all it takes.